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Hate to lose

‘Losses loom greater than gains’. Such a clear statement is the conclusion at which Kahneman and Tversky arrived after studying people's preferences when dealing with situations that involve uncertainties.

This means we need to gain a lot more in order to accept the risk to lose. In fact, this bias has been quantified: gains need to be about 2 times bigger than losses in order to compensate for our loss aversion.

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Hating to lose comes in several flavors. 

Let’s start by talking about the status quo bias: changes to our present situation are seen as potential loses to what we already have. So, just in case we keep things as they are.

Another face of loss aversion is the power of scarcity. The prospect of not being able to buy an item because of shortage is a strong motivation to get it. Online retailers show how many are items left as one way to create the feeling of scarcity. Creating a real shortage is another strategy: the diamond market works this way. 

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What about free gifts? Suppose your are going to your favorite restaurant and you can choose between the dish you want that comes 20% bigger, or the regular size dish plus a free dessert. Which one would you prefer?

Most people prefer the free dessert. Why? Because the situation is perceived as choosing between taking a profit (more food) or taking a loss (no dessert!). So we go for that sweet something, even if its actual value is less than the other option.

After all, we hate to lose! 

Kahneman, D., & Tversky, A. (2013). Prospect theory: An analysis of decision under risk. In Handbook of the fundamentals of financial decision making: Part I (pp. 99-127).

Kahneman, D., Knetsch, J. L., & Thaler, R. H. (1991). Anomalies: The endowment effect, loss aversion, and status quo bias. Journal of Economic perspectives, 5(1), 193-206.

Samuelson, W., & Zeckhauser, R. (1988). Status quo bias in decision making. Journal of risk and uncertainty, 1(1), 7-59.


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