Have you ever won a £10 bet with a friend and only felt okay about it? Have you ever lost a £10 bet and felt completely defeated? Loss aversion can explain why.
People are more likely to choose to avoid the pain of losing £10 than they are to enjoy gaining £10. Loss aversion explains the cognitive bias whereby people feel the pain of losing 2X more than the joys of winning.
Loss aversion is perhaps most prevalent when we are making financial decisions but it affects many other aspects of our life. The larger the loss, the more we feel it’s impact.
Loss aversion can negatively contribute to decision making. This is because as human beings, we don’t like to lose; and the fear of loss can stop us from taking risks, even if these risks benefit us positively. If the fear of loss is too much, it can block us from making good decisions for fear of failing.
So how can we prevent loss aversion from affecting our decisions? One way is our perspective. When faced with a decision, thinking about the worst possible outcome can help. This encourages us to rationalise better as we become more perceptive about our feelings of loss and help us think more objectively.
Similarly, how we frame each decision can have an impact. If we frame the question differently – via a positive frame than a loss frame – we can make better decisions without the fear of loss. By focusing on what we can gain from a situation can help dampen the effect loss can have on our response.
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