Loss aversion: what does this psychological phenomenon consist of?

Let's imagine that we are in a contest and they offer us two options: give us a total of € 1000 or risk winning € 1200 with an 80% chance of getting them (although with a 20% chance of not taking nothing).

What would we do? It is possible that some decided to risk the second option, although many others would choose the safest option.

This difference is due to the presence of different ways of thinking and the presence of different tendencies and cognitive biases and emotional. In the case of those who choose not to risk and obtain the lower but safe amount, their action can be explained in largely before the concept known as loss aversion, which we are going to talk about throughout this Article.

Loss aversion: what are we talking about?

The name loss aversion is given to the strong tendency to prioritize not losing before winning. This tendency is understandable as a resistance to loss due to the high emotional impact that the possibility of losing generates, a possibility in fact the The presence of losses generates an emotional activation much greater than that caused by a possible gain (specifically around two or two and a half times more).

We are facing a type of heuristic or mental shortcut that can cause us a cognitive bias that favors non-risky behaviors for fear of losses: we can not risk ourselves to obtain a more useful good or even risk and lose more than necessary if what we try is to avoid a lost. We give what we have greater value than what we can earn, something that means that we tend to try to avoid losing above all else unless it is very attractive to win.

Keep in mind that loss aversion is not good or bad by itself, and deep down it has an evolutionary sense: if we have a food source a few meters away but we can see a predator several meters away, it is possible that taking risks will cause us to death. Or in the example of the introduction: we are going to win 1000 €, do those 200 extras compensate the possibility (even if it is small) of not winning 1000?

Ultimately, aversion to loss seems to be a psychological predisposition that corresponds to the survival mechanisms that have evolved throughout our lineage, and this It is expressed in terms of both physical and economic losses.

Fundamental point of prospect theory

This concept is one of the key elements of the prospect theory of Kahneman and Tversky., which investigated human decision making and developed the expected utility hypothesis (which establishes that in the face of a problem or situation in which we have to make a decision, we tend to choose the option that we consider most useful in terms of cost / benefit). Thus, loss aversion is contextualized in the decision-making framework, and is based on the belief that the risky behavioral choice may lead us to experience higher costs than Benefits.

Now, even if there is this aversion to loss, it does not mean that our behavior will always be the same. Our choices largely depend on the frame of reference from which we start: if we are faced with a choice that can surely earn us profits, we usually opt for the most probable option even if it is less, while in case of facing a choice that can only generate losses, the behavior is usually the opposite (we prefer to have an 80% chance of losing € 120 instead of having a guaranteed loss of 100€).

This last aspect leads us to have to indicate that loss aversion is not risk aversion per se: we can risk losing more instead of losing a fixed lower amount.

It is important to bear in mind that this aversion to loss is not always as powerful: guaranteeing 100 euros or being able to reach 120 is not the same as guaranteeing 100 but opting to win 100,000. What is relevant to us, or in other words the incentive value, that the stimulus has in question that we can achieve is also a factor that can influence our elections.

In what areas does it affect us?

The concept of loss aversion has been generally associated with the economic, assessing, for example, behavior in business, gambling or stock market environments. However, we are talking more about behavioral economics, not just monetary.

And it is necessary to bear in mind that aversion to loss is a cognitive bias that is present in other facets of life: it is part of our taking of decisions at the level of employment, studies (an easy example to see is when we face a multiple choice exam with a penalty for error) or even when establishing plans of action.

Aversion to loss of behavior in the face of aversive emotional stimuli has also been observed, and this tendency has even been analyzed in subjects with psychopathologies such as major depression, in which loss aversion seems to occur to a greater extent and generate a lesser tendency to act risky than in non-subjects. clinical

Neuroanatomic involvement

Loss aversion has generally been studied at the behavioral level, but some studies (such as that of Molins and Serrano from 2019) have also investigated what brain mechanisms may be behind this trend.

The different studies analyzed seem to indicate that there would be two systems, one appetitive and one aversive, that interact and allow us to make a decision. Within the first, which would have activity when possible gains are recorded and not before losses and that is associated in search of rewards, the striatum and much of the [cortex frontal] (/ neurosciences / prefrontal-cortex. In the second, the aversive, they highlight the amygdala (something logical if we think that it is one of the structures most linked to fear and anger) and the anterior insula, in addition to others brain regions.

Thus, the brain processes information differently depending on whether it has to do with chances of winning, or if it is more related to losses. This means that both processes can be different in terms of their emotional implications, producing the asymmetry that is behind the aversion to loss.

Although these systems are complex and it is still not entirely clear how they work, when the subject is faced with a choice in which he may lose, the appetitive system is deactivated (unless it is considered that what can be gained is a sufficient incentive to take risks) and at the same time the aversive system would be activated. This would lead to a cognitive and behavioral reluctance to lose. Likewise, it is suggested that there may be patterns of brain functioning that, even without facing a decision, are linked to a cognitive style that tends to this aversion to loss.

Bibliographic references:

• Gal, D.; Rucker, D.D. (2018). Loss Aversion, Intellectual Inertia, and a Call for a More Contrarian Science: A Reply to Simonson & Kivetz and Higgins & Liberman. Journal of Consumer Psychology, 28 (3): pp. 533 - 539.
• Kahneman, D., Knetsch, J. and Thaler R. (1991). The endowment effect, loss aversion, and status quo bias: anomalies. J Econ Perspect, 5: pp. 193 - 206.
• Kahneman, D. and Tversky, A. (1979). Prospect theory: an analysis of decision under risk. Econometrica, 47: 263-91.
• Molins, F. and Serrano, M.A. (2019). Neural bases of loss aversion in economic contexts: systematic review according to the guidelines. Prisma Journal of Neurology, 68: pp. 47 - 58.
• Seymour, B.; Daw, N.; Dayan, P.; Singer, T.; Dolan, R. (2007). Differential Encoding of Losses and Gains in the Human Striatum. Journal of Neuroscience 27 (18): pp. 4826 - 4831.
• Yechiam, E.; Hochman, G. (2013). Loss-aversion or loss-attention: The impact of losses on cognitive performance. Cognitive Psychology, 66 (2): pp. 212 - 231.