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Loss aversion is the phenomenon that losses tend to be given greater weight than gains.

Quite simply, the annoyance of losing 100€ is generally much more intense than the joy of winning the same amount.

Loss aversion is a fundamental discovery of the 1979 ‘Prospect Theory’, developed by psychologists and economists Daniel Kahneman and Amos Tversky.

It is considered an anti-rational cognitive bias, if for example we think we have dropped 1€ down a drain and shortly after we find 1€ on the ground, rationally our balance stands at 0€ while emotionally we are not even in a break-even phase precisely because this bias comes into play!

Let us take another example to understand it better.

The US economist Colin F. Camerer in 1990 observed taxi drivers in the highly competitive New York market, paying particular attention to their fluctuating earnings and working hours.

On days when demand was high, drivers would actually have to work longer hours to compensate for days when demand would be low.

It was exactly the opposite: taxi drivers set a fixed sales target for each day and instead worked especially long hours on days with low demand, in order to reach their daily target anyway.

Another theory supporting loss aversion is the endowment effect which states: “If we have something, it is worth more to us.”

If you enjoyed this article, don’t miss the next one!

We will see how to apply the loss aversion principle to corporate life!