Bias in the spotlight: loss aversion

To agree to a gamble with a 50-50 chance of winning or losing, generally speaking, most people would need to gain twice as much as they stand to lose. For instance, most people would need to be offered at least £20 in order to gamble on a coin toss where they could lose £10.

Few are immune to this emotional response. Andre Agassi, the US tennis star once said: “A win doesn’t feel as good as a loss feels bad, and the good feeling doesn’t last as long as the bad.”  

During a match or a race, athletes can actually perform better when they are trying to avoid losing points or have been under-performing, than if their efforts will simply strengthen their lead. For example, golfers are often more focused when putting for par to avoid a loss.

Research analysing 2.5 million putts in the PGA tour found that professional golfers make par putts (so avoiding dropping a shot) more often than birdie putts (one shot better than hole par).

Here’s Tiger Woods on this: “Any time you make big par putts, I think it’s more important to make those than birdie putts. You don’t ever want to drop a shot. The psychological difference between dropping a shot and making a birdie, I just think it’s bigger to make a par putt.”

What might this mean for the top 20 professional golfers? Well, their score would improve by more than one stroke per tournament and, on average they would earn 17.6% more – roughly an additional $640,000 more per year from PGA earnings – not including additional income from endorsements and commercial sponsorship.

While most of us are not top athletes, there are undoubtedly everyday occasions and activities where we might be missing out on big benefits because of loss aversion.

We may also end up making poor decisions due to loss aversion as illustrated in the two scenarios described in a 1985 article in Discover magazine by Kevin McKean on Kahneman and Tversky’s work on loss aversion. Most people choose route A in a first scenario but route B in the second scenario – yet the outcomes are identical. Our decisions differ simply because the potential loss is much more salient in the second scenario.

So thinking harder about how we frame choices and decisions to people can end up having bigger effects on their consequent decisions and behaviour than we might think….

By Crawford Hollingworth at The Behavioural Architects