Bias/Heuristic

Loss aversion

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Demonstrated by Amos Tversky and Daniel Kahneman in 1992, the loss aversion is a simple, but powerful bias. The key idea behind the bias is that people react differently to positive and negative changes of their status-quo. More specifically, losses are said to be twice as powerful compared to equivalent gains. This idea is one of the foundations of the prospect theory and has (some) support from the MRI scans.

Loss aversion motivates a lot of the decision making and is said to be the dominant rationale for risky decisions of high magnitude. Moreover, the concept that foregone gains are less painful than losses can, in fact, bias judgments of fairness and justice, as people seem to perceive differently phrased problems differently. A simple example of loss aversion: If one offers a gamble (a coin toss) with 50-50 chance of winning 100$ and losing 75$, a loss averse person will not accept it (since the satisfaction of winning a 100$ will be smaller than dissatisfaction of losing 75$) despite the fact that the gamble has positive expected value.

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