Loss aversion: what is this psychological phenomenon?

Imagine that we are in competition and that we are offered two options: give us a total of 1000 € or risk winning 1200 € with an 80% chance of getting them (although with a 20% chance of not getting us anything ).

What would we do? Some may decide to risk the second option, although many would go for the safer option..

This difference is due to the presence of different ways of thinking and the presence of different cognitive and emotional tendencies and biases. In the case of those who choose not to take risks and get the smallest but safe amount, their action can be broadly explained by the concept known as loss aversion, which we will discuss later. throughout this article.

Loss aversion: what are we talking about?

This is called loss aversion of the strong tendency to prioritize not losing before winning. This tendency is understood as resistance to loss because of the high emotional impact that the possibility of losing generates, a possibility in fact the presence of the loss generates a much greater emotional activation than that which causes a possible gain (specifically in about two or two and a half times more).

We are dealing with a type of heuristic or mental shortcut that can cause a cognitive bias that promotes dangerous behaviors out of fear of loss: we may not risk getting a more useful good or even risk and lose more than necessary if it does. what we are trying to do is avoid a loss. We give what we value more than what we can earn, which this translates to the fact that we tend to try to avoid losing above all unless there is a win that’s very attractive.

It should be noted that loss aversion is neither good nor bad in itself, and basically it has an evolutionary meaning: if we have a food source a few meters away but we can see a predator several meters away, it is that it is possible that risking ourselves will result in death. Or in the example of the introduction: we will take 1000 €, these 200 extras compensate for the possibility (even if it is small) of not earning 1000 €?

In short, loss aversion seems to be a psychological predisposition that corresponds to the survival mechanisms that have evolved throughout our lineage, and this it is expressed in terms of physical and economic losses.

Fundamental point of prospective theory

This concept is one of the key elements of the prospective theory of Kahneman and Tversky., Who investigated human decision-making and developed the expected utility hypothesis (which states that when faced with a problem or situation in which we need to make a decision, we tend to choose the option we consider the most useful in terms of cost / benefit). Thus, loss aversion is contextualized in the context of decision making and is based on the belief that a risky behavioral choice can cause us to incur higher costs than benefits.

Now, even though there is this aversion to loss, it doesn’t mean that our behavior always has to be the same. Our choices largely depend on the frame of reference from which we start: If we are faced with a choice that can surely win us over, we generally opt for the most probable option even if it is less, whereas in the case of a choice which can only generate losses the behavior is generally the opposite (we prefer to have an 80% chance of losing € 120 instead of having a guaranteed loss of € 100).

This last aspect leads us to have to indicate that loss aversion is not risk aversion in itself: we risk losing more rather than losing a lower fixed amount.

It is important to keep in mind that this aversion to loss is not always so powerful: it is not the same thing to guarantee 100 euros or to be able to reach 120 to guarantee 100 but to choose to win 100,000. What is relevant to us is, or in other words the incentive value, which has the stimulus in question that we can obtain, is also a factor that can influence our choices.

In what areas does this affect us?

The concept of loss aversion has generally been associated with economics, Promote, for example, behavior in professional environments, games of chance or baggage. However, we are talking more about behavioral economics, not just money.

And we must keep in mind that loss aversion is a cognitive bias present in other facets of life: it is part of our decision-making at the level of employment, education (a easy to see example is when we are faced with a test type exam with error penalty) or even when it comes to establishing action plans.

Loss aversion to behavior in the face of aversive emotional stimuli has also been observed, and this trend has even been analyzed in subjects with psychopathologies such as major depression, in which loss aversion appears to result in a greater extent and generate a lower trend. risky action only in non-clinical subjects.

neuroanatomical implication

Loss aversion has generally been studied at the behavioral level, but some studies (like that of Molins and Serrano in 2019) have also investigated the brain mechanisms that may be behind this tendency.

The different studies analyzed seem to indicate that there are two systems, an appetitive and an aversive, Which interact and allow us to make a decision. In the first, which would be active when possible gains are recorded and not before losses and which is associated with the pursuit of rewards, they emphasize the streak and much of the [corteza frontal](/ Neurosciences / prefrontal cortex. In the second, the aversive, highlights the amygdala (which makes sense considering that it is one of the structures most closely related to fear and fear). anger) and the anterior insula, among other areas of the brain.

Thus, the brain processes information differently depending on whether it is about chances of winning or whether it is more related to losses. This causes the two processes to be different in terms of their emotional implications, resulting in the asymmetry behind loss aversion.

Although these systems are complex and their operation is not yet completely clear, when the subject is faced with a choice in which he risks losing, the appetitive system is deactivated (Unless what can be won is seen as a sufficient incentive to take risks) and at the same time the aversive system would be activated. This would make them reluctant to lose cognitively and behaviorally. It is also suggested that there may be patterns of brain function which, although not faced with a decision, are linked to a cognitive style that tends towards this aversion to loss.

Bibliographical references:

  • Gal, D .; Rucker, DD (2018). Loss aversion, intellectual inertia and a call for a more contrary science: a response to Simonson and Kivetz and Higgins and Liberman. Journal of Consumer Psychology, 28 (3): pages 533-539.
  • Kahneman, D., Knetsch, J. and Thaler R. (1991). The endowment effect, loss aversion and the status quo bias: anomalies. J Econ Perspective, 5: pages 193 to 206.
  • Kahneman, D. and Tversky, A. (1979). Perspective theory: risky decision analysis. Econometrics, 47: 263-91.
  • Molins, F. and Serrano, MA (2019). Neural bases of loss aversion in economic contexts: a systematic review according to the guidelines. Prism Journal of Neurology, 68: p. 47-58.
  • Seymour, B .; Dawn.; Dayan, P .; Singer, T .; Dolan, R. (2007). Differential coding of losses and gains in the human utensil. Journal of Neuroscience 27 (18): pages 4826-4831.
  • Yechiam, E .; Hochman, G. (2013). Loss aversion or attention to loss: the impact of loss on cognitive performance. Cognitive Psychology, 66 (2): pages 212-231.

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