The desire to avoid a loss IMPROVES even a professional’s performance. The pain of losing also explains why, when gambling, winning $100 and then losing $80 feels like a … Loss aversion bias expresses the one-liner – “the pain of losses is twice as much as the pleasure of gains.” As an example, we can talk about a phenomenon we see among investors. Decision-making is hard business. Investors become irrationally risk averse and overly fearful. Specifically, the value of a certain consequence is not seen in terms of its absolute magnitude but in terms of changes compared with a reference point. Loss aversion is the reason we see phrases like “last chance” or “hurry” in marketing campaigns so often. For example, in his recent address at the 71st CFA Institute Annual Conference, Kahneman stated that loss aversion causes investors to overweight losses relative to gains and therefore leads to flawed investment decision making. Instead, the pain and regret of the lost money will cause them to bet more in hopes of coming out on top. Defining ‘Loss Aversion’ People are reluctant to lose or give up something, even if it means gaining something better. Kahneman & Tversky's (1979) prospect theory identified loss aversion as way to explain how people assess decisions under uncertainty. Some common examples include: Holding onto a losing stock investment; Refusing to sell a home with a mortgage substantially above its market value Not to mention choosing a career. Loss Aversion. You Throw Good Money After Bad. The classic example of loss aversion comes from a casino. Peoples loss aversion is stronger when they are losing something than gaining. Buying a car or committing to a mortgage stand out as major, energy-draining decisions. Theoretical Explanation of Loss Aversion. As one of our automated responses in behavioral economics, loss aversion facilitates decision-making, by leading us to avoid losses at all costs. As the old saying goes, “A bird in the hand is worth two in the bush.” To explain loss aversion, behavioral economists rely on a model, developed in 1979, called prospect theory. If you ask new investors to invest in the equity market , the first response they will give is this – “No, I don’t want to fall prey to the losses of the equity market.” But for years now, marketers have been using these words to trigger responses from buyers. Loss aversion can also help your business keep existing customers. Instead say: … Judith Rawnsley, who worked for Barings Bank and later wrote a book about the Leeson case, proffered three explanations for Leeson’s behavior once the losses had started to pile up: 1) Leeson’s loss aversion stemmed from his fear of failure and humiliation; 2) his ego and greed were exacerbated by the macho trading environment in which he operated; 3) he suffered from common distortions in thinking patterns … Loss Aversion is a pervasive phenomenon in human decision making under risk and uncertainty, according to which people are more sensitive to losses than gains. This phenomenon of escaping a losing position is known as loss aversion. Even if we aren’t professional golfers, or astute physicians, the majority of us are affected by loss aversion. Framing the windows in terms of loss aversion is a powerful way to change people’s behaviour. This reference point is variable and can be, for example, the status quo. Fear of loss has a way of immobilizing people. 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