Are you feeling the pang of saving money each month?
It’s like a necessary evil to secure your future. But it’s also true that it can make you feel like you’re going broke. So, what’s the solution?
Did you know that we humans are wired to fear losing more than we love to gain?
Losing a sum of money hurts us twice as much as the happiness we feel by receiving the same amount.
Learn what loss aversion is, why it happens, who can be affected by it, and practical tips on how to protect yourself from making decisions you may regret.
Understanding The “Loss Aversion”
Loss aversion is a cognitive bias that refers to our tendency to focus more on avoiding losses than on acquiring gains. It’s rooted in the fact that the pain of losing something often outweighs the pleasure of gaining something.
Have you ever noticed that when you’re trying to avoid a loss? Do you tend to take bigger risks? So you’ve probably seen those insurance commercials showing you all the things that could go wrong: natural disasters, car accidents, freak accidents!
They create scenarios for you to imagine the worst. Making you feel insecure and scared if you do not have insurance. Indirectly persuading you to obtain one at the earliest.
Their intention is for you to worry about potential losses constantly. This would distract you from realizing that they are relying on your unawareness of the continuous payments required for coverage.
It’s like a magician’s sleight of hand – distract your attention with one hand. While the other is doing the real work. Clever, huh?
Additionally
Now, imagine being told that you need to make some big changes in your life. In view of managing a recent diagnosis of diabetes. So, no more late-night parties filled with junk food and sugary drinks. Instead, you’ll need to follow a strict diet and exercise regimen.
It can be tough to say goodbye to old habits. But think about it – would you rather mourn not being able to indulge in sweets or rejoice in your ability to live a healthy, ailment-free life in the future?
Would you feel bad about losing out on the fun in life? Or would you feel bad about losing your health?
The choice is yours! We must prepare ourselves for a wide range of scenarios and make smarter choices.
We must look for opportunities to gain rather than avoid losses. Remember that attitude, and you’ll be on the road to success in no time!
Exploited And Exploiters
Loss aversion is a cognitive bias that affects us all. Still, it can be especially harmful to novice investors and those with less market experience. These individuals are more likely to take on excessive risks to avoid losses without realizing the potential consequences.
On the other hand, skilled investors may take advantage of loss aversion by creating opportunities to buy undervalued stocks or assets when others are selling out of fear. This allows them to capitalize on panicked selling, often driving share prices down further than their intrinsic value.
Day-To-Day Loss Aversion
- A friend with a pair of tickets for a concert that had already been canceled. However, when the venue suddenly announced that refunds were available, instead of opting for an easy refund, he made the decision to hold onto the tickets. He believed that he would have better luck reselling them on the day of the show.
- A game store owner who closed his shop at the end of the day but left in-store purchases out on display overnight. His intention was to create an enticing opportunity for potential thieves, hoping they would be unable to resist taking something they hadn’t paid for.
- One of my colleagues displayed a strong attachment to his laptop despite its age. He emphasized that losing it would mean losing all his data and the countless hours he had spent setting everything up.
- Facing rejection from a famous university, despite having received acceptance from three other prestigious universities, is causing a person to experience feelings of depression.
Recognizing When You Are Slipping Into The Loss Aversion Trap
To identify if you are experiencing loss aversion, it is helpful to look for signs such as feeling a strong attachment to particular possessions or opportunities, being overly protective of them, and being reluctant to let go even when the gains outweigh the costs.
Thinking and evaluating our decisions objectively can also be beneficial, considering potential risks and benefits unbiasedly.
Also, seeking advice from trusted sources such as friends or mentors can help you gain perspective on difficult decisions.
Overcoming The Loss Aversion
Awareness of your biases
Understanding what drives your behaviors can help you make better decisions and not be influenced by cognitive biases.
Put yourself in different situations
Challenging yourself outside your comfort zone can help you become more open-minded and aware of different scenarios.
Practice self-control
Learning how to gain control over our thoughts and emotions can help us make decisions that are not driven by loss aversion but rather by a more rational thought process.
Accept mistakes and learn from them
Mistakes will happen, but it is important to accept them so that you can learn from them and not be held back by fear of failure or losses.
Use technology tools to support decision-making
Leveraging the power of machine learning and AI-based algorithms can help us better understand potential outcomes while avoiding the pitfalls of our own biased judgments when making decisions.
Speak with a mentor or coach
Talking with someone with experience in dealing with similar situations can provide valuable insights into handling certain risky scenarios and making optimal decisions for our long-term goals or objectives.
Revel in success
Celebrating success helps reinforce healthy patterns and behaviors so we don’t fall back into the trap of loss aversion thinking when faced with new challenges or opportunities in life.
Final Thoughts
In a world where losses get us all shaken up. Unsurprisingly, we’re always on edge, from our money to our relationships.
We can all relate to wanting to avoid the agony of loss. Nobody likes to lose money from the doctor’s office to the bedroom. In case you do, you must be a saint!
Well, the evolution of vaccines and flu shots celebrates the wins! Vaccines to protect us from Smallpox, Measles, Polio, TB, Flu, and many more life-threatening illnesses.
We can now protect ourselves and our dear ones with vaccines and flu shots. Thanks to advancements in medical science, losing lives led to saving them!
Trying to bring about a change in the world? Start with understanding the powerful force of loss aversion bias.
Finally
By using the knowledge about loss aversion, you can improve your decision-making and pave the way for a more just and equitable society.
So don’t let your fears hold you back. Embrace the possibilities of a better future! If you enjoyed reading this blog post, do subscribe to our newsletter. For more tips and tricks on decision-making. Thanks for reading!
Reference
The above article is based on the book Thinking Clearly; this article is here to help us learn and understand how our minds can be tricked by something called cognitive biases.