

Brain Hack: turn your Loss Aversion Bias on its head - pmichaud
http://www.petermichaud.com/essays/loss-aversion-bias/

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pmorici
I don't think his first example is good because it isn't just about a "loss"
it's about feeling wronged. By the reasoning he gives we should just let
criminals and murderers free because it costs more to jail them and give them
a fair trial than it does to just let them be free and commit the occasional
crime.

The argument would be more persuasive if the example used had to do with
something where it was a pure gain / loss as opposed to having a right / wrong
component to it. I think the dating example was better, though that wasn't
used as his central argument.

~~~
CamperBob
True, it was a terrible example. The guy in the story obviously didn't care
about the $11 and change, as much as he cared about seeing justice done. His
impulse has value to society that far exceeds $11.

Edit, re: _By the reasoning he gives we should just let criminals and
murderers free because it costs more to jail them and give them a fair trial
than it does to just let them be free and commit the occasional crime._

In some cases that does in fact make sense... 9/11 comes to mind. The price of
living in a free society isn't $2 trillion plus incalculable collateral harm,
it's losing a building and a couple of planes every once in awhile.

~~~
holiday
Perhaps, but the scam site probably didn't care about the $11 either. I can't
see them in dispair, OMG Somebody claimed the $11 back Crime Doesn't Pay! This
wasn't a serious attack on their "business model".

The Loss Aversion Bias is also behind one of the classic mistakes people make
when investing in stocks: holding on to a loser while the price goes down and
down, unwilling to sell and accept the loss before it gets any worse.

~~~
pbhjpbhj
> _Perhaps, but the scam site probably didn't care about the $11 either._

I'd expect the scammers to have a chargeback, which can be just the difference
but is usually the total value and again can be more with an admin cost added.
They also get a black mark from the bank which could with repetition lead them
to having their account closed (but probably not if they're making good
profits for the bank).

Banks don't like spending money that could be used for bonuses and so the
admin costs are more significant and will turn the bank off their client quite
readily.

Edit: there's Bystander Effect in there too - why should I complain as it
probably won't do any good because other people won't complain.

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petercooper
The "hack" at the end is a nice touch, but the dilemma raised in the story he
tells isn't really the loss aversion bias, but the _sunk cost dilemma_.

Joe didn't set out to spend hours to get his $11 back. He thought it'd just
take an e-mail to resolve it - easy. After that was unsuccessful, he thought
it'd just be a phone call to resolve it - easy, no?

Once he got far enough down this road, the sunk cost issue sank in (pun fully
intended) because if he'd already spent an hour or two trying to get $11 back,
he might as well not let that time spent "go to waste" and instead fight until
he achieved success.

~~~
pmichaud
You might be right. Loss aversion is closely related to the sunk cost fallacy.
That's why I wrote this last week:

<http://www.petermichaud.com/essays/sunk-cost-fallacy/>

And I have a post coming up that ties it together. Look for that next week
sometime.

~~~
navanit
Are you planning to change or qualify this current post based on this thread?

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goodside
The actual studies by Kahneman and Tversky mentioned at the start are more
interesting and solid than this handful of anecdotes. If you're not familiar
with them, they might well be one of the most important things you've ever
Googled for.

The results: people weigh losses and gains with "1) a value function that is
concave for gains, convex for losses, and steeper for losses than for gains,
and 2) a nonlinear transformation of the probability scale, which overweights
small probabilities and underweights moderate and high probabilities." This
does little to convey the soul-crushing horror you will feel when you see
these preferences demonstrated experimentally.

~~~
paul
Do you have a particular link? Googling returns a lot of different things.

~~~
DXL
Try the paper(s) named (Cumulative) Prospect Theory.

~~~
realitygrill
Prospect theory has been around for almost 30 years and has it's own problems.
But of course the experimental results are illuminating..

A good summary of these findings can be found in
<http://www.hss.caltech.edu/~camerer/ribe239.pdf>, the intro to Advances in
Behavioral Economics (2003)

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fierarul
I found the article mostly related to the sunk cost fallacy.

Two of the the examples ($11 and the work overtime) are sunk cost fallacy
since people don't know beforehand how long it's going to take and what the
total gain/loss is going to be (how does one know beforehand that all the
overtime will become a 10% wage increase?)

I would discuss some more but it makes no sense to dissect so little material
that seemed to be more confusing than enlightening to me.

Of course, all this comment could be replaced by a downvote which doesn't
exist here.

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wallflower
I think it comes down to no matter how logical you think you are, in a fear
situation it's easy to protect yourself, take the personal loss of not putting
yourself out there, despite the logical fact that you'd be better off in the
long term by acting. Of course, sometimes you do act, against your rational
holdbackness. That is the paradox of bring human. Sometimes it is better that
we just act than think.

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scotty79
Author assumes that his friend didn't realize that he is at loss with the case
which is unlikely.

There are people who prefer to punish others that in their opinion misbehaved
event at their own expense.

Pleasure from punishing misbehaving one is greater for these people than loss
that was necessary to deliver punishment.

Money is no less virtual than pleasure from single person point of view.

