Can We Guess Your Highest Education Level

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Where this bias occurs Individual effects Systemic effects Why it happens Why it matters How to prevent it How it all started Example 1 – Insurance example 2 – Summary of financial risks Related TDL articles

Is a cognitive bias that describes why the pain of losing is twice as psychologically for individuals as the pleasure of winning. The perceived loss of money or anything of value may seem worse than getting it.

Can We Guess Your Highest Education Level

Loss aversion refers to the tendency of an individual to prefer to avoid losses over gaining equivalent profits. Simply put, it’s better not to lose $ 20 than to find $ 20.

Can We Guess Your Highest Education Level?

Most of us work and live in an environment that is not optimized for making the right decisions. We work with organizations of all kinds to identify sources of cognitive bias and develop tailor-made solutions.

Aversion to loss is common in cognitive psychology, decision theory, and behavioral economics. In our daily lives, the reluctance to lose is especially common when individuals make financial and marketing decisions. An individual is less likely to buy a share if it is considered risky with the potential to lose money, even if the potential for reward is high. It is noteworthy that the aversion to loss increases for individuals as the bets of their choice increase.

In addition, marketing campaigns, such as trial periods and discounts, take advantage of the tendency of individuals to opt for a likely free service. When a buyer incorporates a particular software or product into their life, they are more likely to buy it because they want to avoid the loss they feel when they leave the product. This is because downsizing, whether it’s software trials, expensive cars, or big houses, is an emotionally difficult decision.

Aversion to loss can have a significant impact on our decisions and lead to bad decisions. As individuals, it is clear that we do not want to suffer losses. But the fear of losses can also prevent us from taking well-calculated risks with the potential for attractive returns.

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The aversion to loss is especially common when it comes to spending and managing our own money. Financial decisions can have a particularly big impact on our lives, and if a person fails to make wise and calculated decisions with his finances, his decisions can be harmful.

The reluctance to lose can prevent individuals, companies and countries from making riskier decisions when solving complex problems. Risk aversion is important, but at the same time it can prevent the implementation of innovative and partly riskier solutions.

Prior to COVID-19, Brazil was known around the world for its innovative pandemic tactics. Compared to other prosperous countries, the country faces unique constraints related to poverty and government funding as it seeks to curb pandemics. As already mentioned, their solution to Zika, yellow fever and dengue fever, all transmitted by mosquitoes, was obtained by genetic engineering of the same species of mosquitoes to prevent the spread of viruses. Mosquitoes have been genetically engineered to be completely male, do not cleave and carry a self-destructive gene that causes them to die with all their offspring.

This new method was an extremely risky operation for Brazil, which would be costly for the country and its citizens if it failed.

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The operation was successful, one year after the release of genetically modified mosquitoes, the number of mosquito larvae decreased by 82%, leading to a 91% decrease in dengue fever.

If epidemiologists and politicians in the country had a higher degree of aversion to losses, they might never have taken this initiative and found this unique solution to the global problem.

Oxitec, which provided Brazil with mosquito control technology, has developed a solution that is more efficient and at the same time more environmentally friendly than other traditional methods, such as insecticides. Unfortunately, countries with the greatest risk aversion, such as European countries, continue to lag behind countries such as America and China.

Although European countries would benefit greatly from similar technologies to tackle crop pests, insecticides are still commonly used. In the agricultural sector, Europe generally has a more conservative approach with outdated rules. The reluctance to lose within their decision-making bodies has potentially prevented European countries from trying new and emerging technologies for fear of risk and loss.

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The amygdala is the part of our brain that processes fear. For example, the amygdala creates an automated, conscious feeling of anxiety when we see a snake. The response we feel to loss in this part of our brain is similar to the response of our brain when we respond to turbulence from an airplane or a spider, which means that fear and loss are closely related.

The second area of ​​our brain that is active when we process loss is the striatum. The striatum area handles predictive errors in our minds and helps us better predict things. The striatum shows activity when we experience losses and their equivalent gains, but it lights up more when losses occur.

Finally, the insula area of ​​our brain responds to disgust and works with the amygdala to encourage individuals to avoid certain types of behavior. Neuroscientists noted that in response to the loss, the island area would light up. The higher the prospect of loss, the more activated insulation is compared to the equivalent gain.

While many other aspects of the brain contribute, these three areas are important in dealing with losses and contribute to how individuals respond to those losses. Depending on the strength of these regions, individuals may have a greater or lesser aversion to loss.

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Socio-economic factors also play an important role in the predisposition to aversion to loss, and the social hierarchy has been found to be a good indicator of the level of individual aversion to loss. Ena Inesi, an associate professor of organizational behavior at the London School of Economics, found that people in power are less averse to losses.

In fact, powerful people are generally better prepared to accept a loss if it occurs because of their wealth and network.

. These people therefore attach less importance to losses than the average person, because losses are less risky for them. It has also been shown that powerful and wealthy individuals value earnings more than people without power.

Wealth, like power, also plays a role in an individual’s aversion to loss. Like powerful people, rich people are generally easier to accept the losses they will suffer. An interesting warning about rich people and their level of aversion to loss concerns their social environment. A study in Vietnam found that richer villages were less sensitive to losses than poor villages. But rich individuals who lived in a poor environment had a greater aversion to loss than poor individuals who had to live in a rich village.

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The socio-economic status and environment of the individual thus proves to be very influential on his level of aversion to loss. People with higher average incomes located in richer villages have been found to have less aversion to losses

The cultural background is associated with the degree of aversion of the individual to loss. A study conducted by Dr. Mei Wang researched groups from 53 different countries to understand how different cultural values ​​affect an individual’s perception of losses versus profits.

The group found that people from Eastern European countries tended to have the greatest aversion to losses, while people from African countries tended to have the least resistance to losses.

One explanation for this variation between cultures and aversion to loss may involve collectivist cultures as opposed to individualistic cultures. People from collectivist cultures more often had more and stronger social ties, which means that if they made a bad decision and suffered a loss, these people would have the support of friends, family and friends.

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This support system has helped individuals take risks without feeling so intense. On the contrary, people from individualistic cultures do not have the same social safety net as their collectivist counterparts.

Many of the most important decisions an individual will face will require losses. Aversion to loss can prevent people from making the best decisions to avoid failure or risk. Although risk aversion is useful in many situations, it can prevent many people from making logical decisions because the fear of losing is too intense.

Aversion to loss is a natural human tendency to prevent us from suffering losses. As already mentioned, it is essential to know how to avoid aversion to losses and its impact on decisions, especially when making decisions with potential profits.

The way a transaction is constructed can significantly affect an individual’s perception of loss aversion. Framing a question such as loss or profit can change an individual’s answer or decision.

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When faced with a decision that may be affected by loss aversion, try formulating the question differently to emphasize the potential profit from the trade.

An easy way to combat loss aversion is to wonder what the worst outcome would be if action were taken. Usually, it helps individuals put the loss and the associated strong feelings of loss into perspective and better rationalize whether it is worth making a decision or not.

The term was first coined in 1979 in a groundbreaking paper on subjective probability, but was most prominently described in 1992, when researchers uncovered a critical idea behind bias: people react differently to negative and positive changes. In particular, their research has shown that losses are twice as strong as

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