LOSS AVERSION

cut your losses

The concept of “loss aversion” refers to the tendency for people to prefer avoiding losses over acquiring gains. For example, losing $50 impacts your level of happiness much more than winning $50.  Simply put, losing what we have is much more painful than gaining something of the same value.  It’s the reason we hoard drawers full of old t-shirts and why we hold onto investments when their value drops below what we paid to buy them.

 

First introduced by Tversky and Kahneman in 1979, numerous studies have supported this theory, with some research suggesting that losses are as much as twice as psychologically powerful as gains.

 

While avoiding loss has its place from an evolutionary perspective, we often let this biological pull lure us into rationalizing decisions that don’t serve us.  We stay in a bad job because we fear being unsuccessful in a new role.  We avoid rejection by not asking and avoid failure by not trying.

 

We remain safe and comfortable, and life passes us by.  But in the end, we regret those things we haven’t done over the ones we have tried and failed.

 

Why?  Because “loss aversion” is a short-sighted strategy.  It helps us to survive in the moment, but never truly THRIVE.  When we avoid taking that first step to start a business, writing the first chapter of that book, or finally ending the relationship that isn’t right for us, we avoid a short-term loss: temporary pain.  However, we potentially set ourselves up for a longer-term loss: years of regret.

 

Our cavemen ancestors didn’t have the luxury of thinking for the longer-term, so loss aversion served them well.  However, we DO have this opportunity, but often let fear of the unknown or what other people think rob us of it.   Even the term “cut our losses” has a negative connotation. Why don’t we call it “maximize our gains”?

 

The good news?  Today is the last day it has to be the way it’s always been.  There will always be risks in decisions.  In many ways, it’s what makes life interesting.

 

According to the theory, avoiding loss is a bigger motivator when the perceived gain is similar.  What if you maximized what you might GAIN in such a manner that it completely outweighs the risk?  This is often the point when people take action.  But why hit the proverbial “rock bottom” before taking action?  Why not make the decision on your own terms?

 

So, what can you do this week to maximize your gains?

 

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