Loss Aversion

As I entered my 70s, I naturally started considering questions that younger folk don’t think about much (if at all). One of them is death. And that led to other a few other seemingly unrelated questions. After a while, though, I began to see a common thread.

Let’s take these three questions, each from different aspects of my life (and I assume for most people):

1) Why do we fear death? (Existential)

2) Why are most people not willing to take a 60% chance of making a “bundle” in the stock market with a 40% chance of losing the same size bundle? (Financial)

3) Why do we read a lot more bad news than good news in our daily news digest? (Information)

Here’s why it’s logical to ask the first question (assuming that one doesn’t believe in a fiery “afterlife”). The universe has existed for about 13.7 billion years and all that time you did not exist! Did you suffer? No. Were you waiting in anticipation to join the living? Again, no. So why should you fear spending the next X billions of years in the same condition that you spent all the time that existed before you came into being?

My second question seems to be even more illogical – according to simple probability, taking such a stock market “gamble” makes eminent sense, as the chance of gaining is better than the chance of losing money.

The answer to these first two questions (conundrums, if you wish) is the same: “loss aversion”. Human beings have a greater sensitivity to losing something than gaining something. Put another way, we suffer more pain when we lose what we have, than when we gain what we didn’t have. Thus, we aren’t keen on losing our money on the market – even if the chances are better than even of making the same amount. And as for death, well that’s now obvious: before we were born, we didn’t have anything to lose; after we’ve come into the world, we have a lot to lose in death: our life. It’s a lot more emotionally painful to think about losing the life we have than gaining a new life (even if we could “think” about that before were born).

Is this just an abstruse intellectual exercise? Not at all. Loss aversion is something we live with every day of our life. Which brings us to the third question regarding “the news”. If you picked up your daily newspaper (or surfed to the homepage screen), what would you think if this is what you saw: YESTERDAY MILLIONS OF PEOPLE SPENT THE DAY WITHOUT MISHAP. Ridiculous, no? Well, actually it’s not so silly – in principle. After all, what’s wrong with good news? Objectively, is it any less “newsy” than bad news?

However, as humans we are “primed” to be acutely aware of negative news, a/k/a anything that can harm us. Good things are nice, but they generally won’t severely affect us. Why are we like that? It harks back to early evolution. Imagine the early hominid in the savannah. All of a sudden, he sees movement in the tall grass nearby. Is it the wind? Or a predatory tiger? If it’s the “good news” (just the wind), well that nice; but if it’s the tiger, he better move fast and get out of there. Obviously, he was (and we still are) primed to consider and act on the possible bad news way ahead of the possible good (or neutral) environmental stimulus.

There have been several serious attempts at publishing “Good News” daily newspapers, and all have failed – despite their good news being invariably significant: cancer cures; new inventions; public policies that actually work to make life better; etc.

The irony, of course, is that good news can also save life. (Or significantly improve its quality.) Think about the latest health news regarding a new medicine for your condition; about the latest gadget that can save your tot’s life (e.g., not forgetting her in the car); the newest extra-bank institution (Fintech) offering a much cheaper mortgage; the end of a civil war in a country you’ve always wanted to visit; a brand new type of university B.A. program that you’ve always wanted so that you could change your career path to what you really wanted to do all along; and so on. Most of these are not “earth-shaking” news items – but neither are most “bad news” items that pass for journalistic reportage these days.

Good news delights us – we can all use a good smile once in a while. But bad news makes us afraid – and fear beats happy every day of the year. What we need, and have to actively search out, is a lot more of the former to counteract the latter. We should all work harder at turning “loss aversion” into “gain provision”.

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