Loss aversion is caused by a mixture of our neurological makeup, socioeconomic factors, and cultural background.
Three specific regions of the human brain become activated in situations involving loss aversion.
The amygdala is the part of our brain which processes fear. For example, the amygdala creates an automated, pre-conscious sense of anxiety when we see a snake. The reaction we experience with loss in this part of our brain is similar to our brain’s response to when we react to airplane turbulence or a spider, meaning fear and loss are closely related.5
The second region in our brain that is active when we process a loss is the striatum. The striatum region handles prediction errors in our minds and helps us become better at predicting things. The striatum shows activity when we experience both losses and their equivalent gains, but it lights up more for the losses.6 The striatum helps us avoid losses in the future.
Finally, our brain’s insula area reacts to disgust and works with the amygdala to make individuals avoid certain types of behavior. Neuroscientists have noted that the insula region lights up when responding to a loss. The higher the prospect of loss, the more activated the insula becomes compared to an equivalent gain.7
Though there are many other aspects of the brain that contribute, these three regions are significant when processing a loss and add to how individuals respond to these losses. Depending on the strength of these regions, individuals may be more or less loss averse.5
Socio-economic factors also play an essential role in one’s disposition to loss aversion, with social hierarchy proving to be a good indicator of an individual’s level of loss aversion. Ena Inesi, an Associate Professor of Organizational Behavior at the London School of Economics, found that people in power are less loss averse.8 This is because powerful individuals are typically in a better position to accept a loss if it should incur, due to their wealth and network8. As a result, these individuals give less weight to losses than the average person, as losses are a less risky endeavor for them. It has also been proven that powerful and wealthy individuals give more value to gains than non-powerful people8.
Wealth, similar to power, also plays a role in an individual’s loss aversion. Like powerful people, wealthy people typically have an easier time accepting losses they incur. An interesting caveat regarding wealthy people and their loss aversion levels involves their social environment. A study done in Vietnam revealed that wealthier villages were less loss-averse than poor villages. But, wealthy individuals, who lived in poor environments, were more likely to be loss averse than a poor individual who was to live in an affluent village9.
Thus, an individual’s socioeconomic status and environment prove to be very influential in regards to their level of loss aversion. Individuals with a higher mean income, situated in wealthier villages, were found to be less loss-averse9. Additionally, wealthy individuals or powerful individuals were more willing to take on risk8. These socioeconomic combinations of traits all influence an individual’s loss aversion, and willingness to take on risk when decision-making.
Cultural background has been linked to how loss-averse an individual may be. A study conducted by Dr. Mei Wang surveyed groups from 53 different countries to understand how different cultural values affect an individual’s perception of losses compared to gains.10 The group discovered that people from Eastern European countries tended to be the most loss averse, with individuals from African countries being the least loss averse.
One explanation for this variation among cultures and loss aversion can be linked to collectivist vs. individualist cultures. Those from collectivist cultures were more likely to have more and closer social connections, meaning that if they made a poor decision and incurred loss, these individuals would have support from their friends, family, and community.11 This support system helped individuals take risks without feeling losses as intensely. Inversely, those from individualistic cultures didn’t have the same social safety net as their collectivist counterparts.