Loss aversion
Lesson 11 of 31 in the course “Brain Hacks”. Free, with animations and a quiz.
The coin flip everyone turns down
Here’s an offer: we flip a coin. Tails, you lose $100; heads, you win $150. On average it pays: plus $25 per flip. Yet most people say no. The reason is simple: the fear of losing $100 is stronger than the joy of winning $150. Ask people what gain would balance a chance of losing $100, and many say about $200, twice the loss. Across experiments the ratio is usually between 1.5 and 2.5. Scientists still debate how strong the effect is and whether it shows up everywhere, but in decisions involving amounts that matter to you, it often appears.
Mine means pricier
Students were handed ordinary mugs with the university logo. Some were asked the price at which they’d sell their mug. Others, how much they’d pay for an identical one. A third group could choose: the mug or cash. The medians: sellers asked $7.12, choosers valued the mug at $3.12, buyers would pay $2.87. The best part: sellers and choosers face exactly the same choice, leaving with a mug or with money. The only difference is that the sellers already hold the mug, and giving it up feels like a loss. That’s why Danya, selling his old console, asks more than he’d pay for one himself.
Why people hold on to losers
Imagine you need cash and must sell one of two stocks: one is up, the other is down by the same amount. Almost everyone sells the one that’s up: it feels good, “I made money”. Selling the loser means admitting the loss, so people hold it hoping to “get back to even”. This has a name: the disposition effect. A study of thousands of individual investors’ accounts found they sold winning stocks noticeably more often than losing ones. And the “winners” they sold went on to beat the “losers” they kept by about 3.4 percentage points over the following year. Same in crypto: a coin in the red gets held for years, while a rising one gets sold too early.
Even pros fear losses
In golf, each hole has a target number of strokes, par. Missing it means losing a stroke, while one under par, a birdie, is a bonus. Economists analysed over 2.5 million pro putts near the hole. At every distance, players sank more putts when putting for par, to avoid a loss, than when putting for birdie, to win. The gap was 3.6%. That’s no small thing: if one of the greatest golfers ever had putted for birdie as accurately as for par, he’d have earned almost $1 million more per season. Nobody slacks off on purpose: the threat of a loss simply focuses attention more than a chance to gain.
The frame decides
People were told about an outbreak of a dangerous disease expected to kill 600, and two plans. The first group heard: “With plan A, 200 people will be saved” or “a 1/3 chance all are saved, a 2/3 chance none are”. 72% picked the sure plan A. The second group heard the same plans framed as losses: “With plan C, 400 people will die” or “a 1/3 chance nobody dies, a 2/3 chance all 600 die”. Now only 22% picked the sure option. The outcomes are identical; only the words changed. When we talk about gains, we play it safe; when we talk about losses, we’ll gamble to avoid them. Marketers know this: “don’t miss the discount” works better than “get a discount”.
The sunk cost trap
Two fans plan to drive 60 km to a match. One paid for his ticket; the other got his for free. On game day, a blizzard is announced. Who’s more likely to go? The one who paid: staying home feels like “throwing money away”. But the money is spent in both cases and can’t be recovered. That’s a sunk cost. It makes us finish boring films, eat food we don’t like, and drag out projects that never take off for years. Danya paid for a year at the gym and drags himself there, though he’d rather run in the park. The check is simple: “Would I do this if I hadn’t invested anything yet?” If not, past spending is no reason to keep going.
Hack: think in series
A famous economist offered a friend a bet: a coin flip, lose $100 or win $200. The friend replied: “Not one, I’d feel the loss more. But if we play 100 times, I’m in.” And he was right: 100 such bets average about $5,000, and the chance of losing any money at all is about 1 in 2,300. Loss aversion makes us view each decision on its own, as if it were life or death. But life is made of hundreds of small favourable bets: emailing a professor with a question, applying for an internship, pitching an idea. Any one can fail, but together they’re almost certainly in the plus. Important: this works only when the odds favour you. In casinos and gambling it’s the reverse: the more bets, the surer the loss.
Hack: “Would I buy this today?”
Danya has a coin that’s down 40%. He’s waiting for it to “get back to his price” and won’t sell. But the market doesn’t care what Danya paid. The purchase price is the past; a decision is always about the future. The right question: “If I had this money now, would I buy this coin at today’s price?” If not, holding it means re-buying, every day, something you wouldn’t buy. Second rule: decide when to exit before you enter. A stop-loss for a trade, a deadline for a project, “three workouts I don’t enjoy and I switch gyms” for a habit. A decision made in advance is calmer than one made in the moment of loss, when your autopilot is shouting “just wait a bit longer”.
Check yourself
- A coin flip: tails, −$100; heads, +$150. Why do most people refuse?
Correct answer: A loss feels stronger than an equal gain. Yes. The fear of losing $100 outweighs the joy of winning $150, so people reject a bet that pays on average. - In the mug experiment, sellers asked $7.12, while choosers valued the same mug at $3.12. Why?
Correct answer: Giving up what’s already yours feels like a loss. Yes. They face the same choice, but the sellers already hold the mug, and parting with it hurts. - Danya’s coin is down 40%, and he’s waiting for it to “get back to his price”. Which question helps him decide more honestly?
Correct answer: Would I buy it today at this price?. Yes. The buy price is the past. The decision is about the future: is this coin worth the money now? - “200 of 600 will be saved” and “400 of 600 will die”. What separates these two options?
Correct answer: Only the wording: the outcome is the same. Yes. 200 saved out of 600 is exactly 400 dead. But framed as “saved”, 72% chose the sure option; framed as “die”, only 22%.