Welcome to The Simplify Your Life Podcast, where we talk about how to create a life you won’t need an escape from! I’m Coach Simona, author of the book “111 Ways to Simplify Your Life”, and I’m glad you decided to tune in!
Now, before we dive into loss aversion bias and some helpful examples when it comes to this cognitive distortion, I want to remind you that this is the eleventh episode of my series on Cognitive Biases and there will be 4 more to come in the upcoming months, so stay tuned for that. If you haven’t listened to the previous episodes, I will leave links to them in
the description box below. I’ve also created a special YouTube playlist, so you can listen to all the episodes on cognitive biases by visiting: youtube.com/coachsimona Now, before we explore loss aversion bias in-depth, let’s clarify what a cognitive bias actually means. A cognitive bias is a systematic error in thinking that affects the decisions and judgments that you make. Another popular term that has the exact same meaning as cognitive biases is cognitive distortion.
Now, as we mentioned, the cognitive bias we’re going to explore in-depth today is called loss aversion. What does this cognitive distortion actually mean? Loss aversion refers to people's tendency to prefer avoiding losses rather than acquiring equivalent gains.
it’s better to not lose $5 than to get $5. Loss aversion bias was first explored by psychologists Daniel Kahneman and Amos Tversky in 1979. They concluded that people experience twice as much emotional pain from losing something as they do pleasure from gaining something of equal value. Another example of loss aversion bias is when someone is offered a promotion at work that involves a higher salary, but also more responsibilities and longer hours.
They may decline the promotion because they are more focused on the potential loss of free time and added stress than the potential gain of a higher salary. ​​Loss aversion is at play here. When they are making the decision, they are not viewing the situation objectively. They’re trying to avoid a potential loss, rather than making a decision based on the potential gain.
As with any other cognitive bias, loss aversion can be difficult to detect, so we need to be aware of its manifestations to be able to spot our error in thinking and choose a better, more objective view of the situation.
do we all struggle with loss aversion bias or is that something that only happens to a handful of us? The short answer is: probably yes. While we can’t confirm that that is the case for every single person on planet earth, it’s definitely something that’s quite common for us, humans. We all have cognitive biases and blind spots, so although we may not struggle with loss aversion bias per se, we’ll definitely have problems with other cognitive biases. I’ve actually made a free
downloadable cheat sheet with the top 15 cognitive biases that may be holding you back. So if you want to download it, just click the first link in the description box below or head over to: bit.ly/15biases Now, let’s go back to loss aversion bias. Here are a few examples to illustrate this bias: As humans, we tend to hold onto things that we already have rather than taking a risk of losing it, even if the potential gain is greater than the loss.
Another example of loss aversion bias is someone who is reluctant to sell a stock that has lost value because they don't want to accept the loss, even if selling would be the more rational decision. That doesn’t mean that there’s anything wrong with you or that you’re being overly cautious. This is a cognitive bias, which means it happens whether or not you want it to happen.
So how can you change that? One thing you can do to become more aware of loss aversion bias is consider the potential gains and losses objectively and rationally before making a decision. Ask yourself the following three questions: 1. What is the potential gain or loss in this situation? 2. Is the potential loss worth avoiding more than the potential gain is worth achieving? 3. Is this a rational or emotional decision?
The more objective you are about your own cognitive biases, the easier it would be to spot loss aversion bias next time you fear losing it all. As you can see, before we come to any conclusions, it would be beneficial to step back and assess the situation objectively. So, how can we do that? What can help a lot when it comes to spotting loss aversion bias is to ask yourself the following questions: 1. Is this a fact? 2. What evidence can I collect to support this statement?
3. Am I being rational here or is this a cognitive bias? 4. If this is a cognitive bias, which one is it? These questions will make even more sense as we go deeper into this topic with the next episodes of the Cognitive Biases series. If you’re curious to see what else we’re going to cover in the next few months, make sure to download your free cheat sheet by visiting: bit.ly/15biases
Thanks so much for tuning in! If you enjoyed this podcast episode, please like it, subscribe, and I’ll see you in the next one!