Understanding Loss Aversion

Lost Sheep, Lost Coin, Lost Son, Lost Sock.

I get the worst luck in traffic. I switch into one lane, and it slows down. So I switch back. And sure enough, as soon as I do, that lane slows down. No matter which lane I'm in, I'm going slower than the guy next to me. I get the same luck in grocery store and movie theater lines. No matter which one I choose, it seems to go slower than the other one. Why is this?

The answer is what behavioral economists call loss aversion - our tendency to prefer avoiding losses to acquiring gains. "Roughly speaking," write Richard Thaler and Cass Sunstein in their bestselling book, Nudge, "losing something makes you twice as miserable as gaining the same thing makes you happy." The pain of losing a hundred dollar bill, for instance, is twice as intense as the happiness of gaining a hundred dollar bill. Princeton professor and Nobel prize-winner Daniel Kahneman has proven this two-to-one ratio of loss misery to gain happiness in a series of ground-breaking studies.

Emotion makes events more memorable. When we experience a hurt or loss, we remember it more. Kids remember their parents divorce, spouses remember the death of their life partner, and workers remember losing their jobs. I'm forty-one years old, and I can still remember hurtful words from childhood. When emotion increases, our memory gets stronger.

This emotion-memory connection means we're more likely to recognize and remember loss events than gain events, because loss events create more emotion. In traffic, grocery lines, and movie lines, we feel more emotion when we're "losing progress" in the slower line than when we're "gaining progress" in the faster line. We remember the fish that got away more than the one we caught. We remember the spelling bee word we missed more than the one we got right.1

Jesus' parables of the lost sheep, the lost coin, and the lost son in Luke 15 shows the motivating power of loss aversion. "Suppose one of you has a hundred sheep and loses one of them. Does he not leave the ninety-nine in the open country and go after the lost sheep until he finds it?" Loss aversion drives the shepherd to take extreme measures. "Or suppose a woman has ten silver coins [a great amount of money in Bible times] and loses one. Does she not light a lamp, sweep the house and search carefully until she finds it?" Loss aversion motivates the woman's diligent search. Then he tells the story of a lost son, and the father's great love that is revealed in that moment. Loss aversion eats at the father, day and night, driving him to search and pray, until his son finds his way home.

As I mentioned in the traffic and movie lines, loss aversion doesn't just apply to the big things. It does in the little things too. As a father of six, it's hard for me to keep my socks together. Kids take them. They fall behind the dryer. They vanish in a host of mysterious ways. I have a bathroom drawer full of lonely socks who are yet to be reunited with their lost partner. I feel the misery. Where are those lost socks? In eternity, when I get a chance to question God about the mysteries of the universe, I'm going to bring this one up. God, where are the socks?

But I digress. The point of my posts are to help you better understand and achieve change. So the question is, how does loss aversion prevent change? And how can we use loss aversion to promote change?

Stay tuned, that's the subject of my next post.

1Thomas Gilovich, How We Know What Isn't So (New York: Free Press, 1991), p. 62.

about erik van alstine

Erik is a change expert and author of the personal finance discipleship system, Breaking Free: Financial Strategies that Transform Debt into Wealth. Breaking Free is like driver's ed in your financial life, a powerful video curriculum that offers experiential learning, assessment, and transformation! Take our free MoneyFinder Quiz to see just how much payoff Breaking Free can create for you!