Loss Aversion

Loss Aversion

What is it?

Loss Aversion is a bias that makes people prefer avoiding losses to acquiring gains.

Loss aversion is a psychological phenomenon where people tend to prefer avoiding losses over acquiring equivalent gains. In other words, the negative emotions associated with losing something are typically stronger than the positive emotions experienced when gaining something of equal value.

Here are two simple examples to help you understand loss aversion:

  1. Money: Imagine you find a $20 bill on the street. You'd probably be happy about your unexpected gain. Now, imagine that you lose a $20 bill from your wallet. The disappointment and frustration you feel from losing the money would likely be more intense than the happiness you felt when you found the same amount. This shows that the pain of losing $20 outweighs the pleasure of gaining $20.

  2. Sales and discounts: Suppose you're shopping for a jacket that originally costs $100. If the store offers a $20 discount, you might feel good about the potential savings. However, if the store raises the price to $120 and then offers a $40 discount, making the final price the same as before ($80), you might feel more compelled to buy the jacket because you perceive a larger discount, even though the price is the same in both si ...