What is loss aversion and why should we care? by Bob Lowry

By Bob Lowry

oxfamamerica.org

Human beings are not always logical or predictable. We have a complex mix of thoughts and behaviors that means sometimes we make choices that baffle others.

There is one trait we all share: Loss Aversion. This is the tendency for people to strongly prefer avoiding losses, even over gains. In fact, this force is thought to be twice as powerful as acquiring gains. In simple terms, we hate losing what we’ve got, even more so than gaining something. If there is a risk of a loss or a gain, we are much more likely to do what we can to prevent a loss. Wikipedia notes, one who loses $100 will lose more satisfaction than another person will gain satisfaction from a $100 windfall. Loses and gains aren’t equal.

This means we tend to avoid risk if there is the potential of loss, even if there is an equal or greater potential for gain. “A bird in the hand is worth two in the bush” is a cliche that applies. What we have we don’t want to lose. This is why someone suffers a large loss on a particular investment in the stock market yet still has a very tough time selling the loser and moving forward. Even as the the losses mount we tell ourselves it might turn around. If we bail out now, the loss is permanent and our mistake is there for all to see.

For a satisfying retirement that can be problematic. By avoiding risk and allowing our loss aversion tendency to dominate we are likely to miss opportunities for new experiences and growth. We are so afraid of a change in the status quo we will remain fixed in place even if our rational mind tells us there is something better available.

My one word that I am attempting to focus on for 2015 is move. After a fall and early winter when I felt stale and lacking any forward momentum, the last month or two have shown me a way forward. As I write this our home has been sold and we have found a single story home closer to our daughters and grand kids. We also want to move to shake up our patterns and lifestyle a bit. After 30 years in one small section of the Phoenix metro we are ready for a change to a different part of town.

Loss Aversion has raised its head a few times during this process. I like our home, its location, and its warmth and comfort. I like our church and being near friends. I like our backyard a lot (so does our dog, Bailey). We are close to a large park that has it all. At times I hear that insistent voice saying to me, “Stay put. Don’t move to something unknown.”

That is the voice of loss aversion telling me to not risk a loss even if I may gain much more in the future. It is a siren call hard to ignore. But, ignore it I must. Betty and I have chosen to take this step. With my dad’s recent passing we are reminded that our time on earth is not guaranteed past this one moment. By avoiding a risk of loss we are bypassing a world of possibilities and gains.

Loss Aversion is a power motivator. I am trying to make sure it is not a dominate feature of my future.

By Bob Lowry

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