Loss Aversion. The desire to avoid a loss IMPROVES even a professional’s performance. Instead say: … But for years now, marketers have been using these words to trigger responses from buyers. Loss aversion can also help your business keep existing customers. Loss Aversion is a pervasive phenomenon in human decision making under risk and uncertainty, according to which people are more sensitive to losses than gains. Even if we aren’t professional golfers, or astute physicians, the majority of us are affected by loss aversion. Specifically, the value of a certain consequence is not seen in terms of its absolute magnitude but in terms of changes compared with a reference point. Most people will behave so that they minimize losses because losses loom larger than gains, even though the probability of those losses is tiny. Loss aversion bias expresses the one-liner – “the pain of losses is twice as much as the pleasure of gains.” As an example, we can talk about a phenomenon we see among investors. Judith Rawnsley, who worked for Barings Bank and later wrote a book about the Leeson case, proffered three explanations for Leeson’s behavior once the losses had started to pile up: 1) Leeson’s loss aversion stemmed from his fear of failure and humiliation; 2) his ego and greed were exacerbated by the macho trading environment in which he operated; 3) he suffered from common distortions in thinking patterns … This reference point is variable and can be, for example, the status quo. This phenomenon of escaping a losing position is known as loss aversion. Kahneman & Tversky's (1979) prospect theory identified loss aversion as way to explain how people assess decisions under uncertainty. Investors become irrationally risk averse and overly fearful. The pain of losing also explains why, when gambling, winning $100 and then losing $80 feels like a … Instead, the pain and regret of the lost money will cause them to bet more in hopes of coming out on top. Theoretical Explanation of Loss Aversion. Rather than say ‘save £300’ a year by changing your windows. You Throw Good Money After Bad. As one of our automated responses in behavioral economics, loss aversion facilitates decision-making, by leading us to avoid losses at all costs. Fear of loss has a way of immobilizing people. Not to mention choosing a career. Some common examples include: Holding onto a losing stock investment; Refusing to sell a home with a mortgage substantially above its market value Framing the windows in terms of loss aversion is a powerful way to change people’s behaviour. It’s no surprise that consumers are beginning to look at these trigger words as noise. Some play safe and avoid changes to protect their business from market loss or any disaster. As the old saying goes, “A bird in the hand is worth two in the bush.” A typical financial example is in investor’s difficulty to realize losses. For example, in his recent address at the 71st CFA Institute Annual Conference, Kahneman stated that loss aversion causes investors to overweight losses relative to gains and therefore leads to flawed investment decision making. To explain loss aversion, behavioral economists rely on a model, developed in 1979, called prospect theory. Loss aversion can be explained by the way people view the value of consequences. If you ask new investors to invest in the equity market , the first response they will give is this – “No, I don’t want to fall prey to the losses of the equity market.” Decision-making is hard business. People who lose money on a bet are unlikely to give up, collect their things and head home. Defining ‘Loss Aversion’ People are reluctant to lose or give up something, even if it means gaining something better. 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