PROJECT M
 

Going beyond the monkey business

If humans are so smart, then why do they consistently make such stupid logical mistakes?

Greg Langley
© WpN

Going beyond the monkey business

If humans are so smart, then why do they consistently make such stupid logical mistakes?

Greg Langley

Loss Aversion

Classic economics holds that people are rational, self-interested and exercise self-control. However, behavioral economics shows that the mind can be susceptible to mental shortcuts that lead to erroneous decisions. At the core of many such decisions is “loss aversion,” or the tendency to prefer avoiding losses over acquiring equivalent gains.

Described by Prospect Theory: An Analysis of Decision under Risk (Kahneman and Tversky, 1979), loss aversion is when the pain of losing $100 is approximately twice as great as the pleasure of winning the same amount. Loss aversion affects many decisions, including financial ones. As people prefer avoiding losses to making gains, they have a tendency to hold on to losing stocks too long. Alternatively, they sell winning stocks too soon because this realizes a gain and gives pleasure.

That loss aversion is also found in capuchin monkeys and possibly other species makes sense in terms of evolution and survival. While roaming the savannah, it was certainly better to give that sabre-toothed tiger a wide berth rather than suffer the ultimate loss! But today, loss aversion can lead to inertia and may find people failing to undertake actions that may be in their own best interests (such as dieting, saving or exercising), rather than change the status quo.

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