Do you have the loss aversion bias?

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. If you ask new investors to invest into equity market, the first response they will give is this – “No, I don’t want to fall prey to the losses of equity market.” The most hilarious part is they don’t even know anything about the equity market; but still they want to avoid losses/risks at all cost.

Loss aversion bias brings us to the classic cases of three biases. Let’s look at them one by one.

1 – ENDOWMENT EFFECT
This bias is very common. Let’s say you have an old TV and you want to replace the old one with a new one. Whenever you would look at the exchange value, you will say that the value isn’t enough. This is a case of endowment effect. Because we seem to overvalue what we own regardless of its objective market value.

2 – SUNK COST FALLACY
Loss aversion bias brings in another bias called “sunk cost fallacy”. It says that we seem to continue a demeanour as on-going commitment as a result of previously invested resources. The resources can be time, money, or effort. For example, let’s say you went to a restaurant and you order a lot of food thinking you and your family would be able to eat all. Then after a while, you realize that whatever you ordered is too much for the entire family. But instead you will try to finish all the food to avoid sunk cost fallacy. This bias is very common and you would be able to find out many more examples as you look into your personal and professional life. Through this bias, our pay-off is to save the money, time, effort we already invested instead of letting them go.

3 – STATUS QUO BIAS
This bias is more dangerous than the other two, because this bias tends to make people closed to other opportunities and solutions. It says that we tend to remain same by sticking to a decision we made earlier. For example, let’s say that you have taken an insurance plan. After few months, you realize that there’s another plan which will be much more beneficial in all aspects. But due to status quo bias, you wouldn’t take the new plan and would stick to the one you have already taken. Status quo bias is dangerous because it allows the inertia to hover over us and as a result, we can’t give ourselves a new direction even when that new direction can be more beneficial to us.

In these three biases, we will see one common thread – we seem to cling to things/ideas quickly and we don’t want to change these by naming them as loss/risk/challenge/obstacle. If you find yourself or those around you with symptoms of the mindset, then be aware. Before you jump into a decision, take some time to consider the different perspective, Better still, get a devil’s advocate, every team needs one. And remember “People do not fear change, they fear loss.”

Check out my related post: How to gain respect from your team?


Interesting reads:

https://hbr.org/2016/11/how-loss-aversion-and-conformity-threaten-organizational-change

https://blogs.sas.com/content/datamanagement/2012/11/28/loss-aversion-and-change-management/

https://www.ideatovalue.com/inno/nickskillicorn/2018/03/how-to-defeat-loss-aversion-the-1-reason-why-middle-managers-kill-innovation/

https://www.wallstreetmojo.com/loss-aversion-bias/

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