Loss Aversion: What Does This Psychological Phenomenon Consist Of?

Loss aversion

Let’s imagine that we are in a contest and they offer us two options: give us a total of €1,000 or risk winning €1,200 with an 80% chance of winning it (although with a 20% chance of winning nothing). .

What would we do? It is possible that some would decide to risk the second option, although many others would opt for the safer option.

This difference is due to the presence of different ways of thinking and the presence of different cognitive and emotional tendencies and biases. In the case of those who choose not to risk and obtain the smaller but safe amount, their action can be largely explained by 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 over 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 presence of losses generates an emotional activation much greater than that caused by a possible gain (specifically around twice or two and a half times more).

We are faced with a type of heuristic or mental shortcut that can cause us a cognitive bias that favors non-risky behaviors due to fear of losses: we may not take risks to obtain a more useful good or even risk and lose more than necessary if what we are trying to do is avoid a loss. We give what we have greater value than what we can earn, something that This means that we tend to try to avoid losing above all else unless there is something to gain that is very attractive.

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It must be taken into account that loss aversion is not good or bad in itself, and deep down it has an evolutionary meaning: if we have a food source a few meters away but we can see a predator several meters away, It is possible that taking the risk will cause us death. Or in the example from the introduction: we are going to win €1000, do those extra 200 compensate for the possibility (even if it is small) of not winning 1000?

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

Fundamental point of prospect theory

This concept is one of the key elements of Kahneman and Tversky’s prospect theory, which investigated human decision making and developed the expected utility hypothesis (which states that when faced with 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/cost). benefit). Thus, loss aversion is contextualized in the framework of decision making, and is based on the belief that the risky behavioral option can lead us to experience greater costs than benefits.

Now, although this aversion to loss exists, this does not mean that our behavior will always be the same. Our choices depend largely on the frame of reference from which we start: if we are faced with a choice that can surely give us profits, we usually opt for the most probable option even if it is lower, 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 being guaranteed a loss of €100).

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

It is important to keep in mind that this aversion to loss is not always equally powerful: guaranteeing 100 euros or being able to reach 120 is not the same as guaranteeing 100 but opting to win 100,000. However relevant it is for us, or said by another In this way, the incentive value of the stimulus in question that we can achieve is also a factor that can influence our choices.

In what areas does it affect us?

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

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

Loss aversion has also been observed in behavior when faced with aversive emotional stimuli, 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 less tendency to take risky action than in non-clinical subjects.

Neuroanatomical implication

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

The different studies analyzed seem to indicate that there would be two systems, one appetitive and one aversive, which interact and allow us to make a decision. Within the first, which would be active when possible gains are recorded and not in the event of losses and which is associated with the search for rewards, the striatum and a large part of the (frontal cortex)(/neurosciences/prefrontal-cortex) stand out. In the second , the aversive, the amygdala stands out (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 other brain regions.

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Thus, the brain processes information differently depending on whether it has to do with chances of winning, or whether 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 loss aversion.

Although these systems are complex and it is not yet entirely clear how they work, When the subject is faced with an election in which he or she may lose, the appetitive system is deactivated (unless it is considered that what can be gained is a sufficient incentive to take the risk) and at the same time the aversive system would be activated. This would cause a reluctance to lose at a cognitive and behavioral level. Likewise, it is proposed 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.

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