
Loss aversion is not supported by the evidence - onuralp
https://blogs.scientificamerican.com/observations/why-the-most-important-idea-in-behavioral-decision-making-is-a-fallacy/?sf194849524=1
======
btn
This article is essentially a press release for the author's own paper:
[https://onlinelibrary.wiley.com/doi/abs/10.1002/jcpy.1047](https://onlinelibrary.wiley.com/doi/abs/10.1002/jcpy.1047)

Which itself is a part of a series of articles in JCP debating the issue:
[https://onlinelibrary.wiley.com/doi/abs/10.1002/jcpy.1054](https://onlinelibrary.wiley.com/doi/abs/10.1002/jcpy.1054)

The definitive statement made by this article's headline isn't really
supported by the evidence presented in the papers. Rather, the state of
affairs seems to be that "loss aversion" has been the victim of incessant
overgeneralisation. It's a very simple hypothesis about human behaviour that
plays nicely into a lot of interesting (and therefore publishable) narratives.
This has lead people to blindly accept the general hypothesis of loss aversion
without enough critical investigation of its manifestation. The authors don't
really refute "loss aversion" (i.e. they don't present an alternative theory
to explain the papers that purport to demonstrate "loss aversion"), but rather
they refute the pop-psychology belief that it's a general principle of human
behaviour.

~~~
jonny_eh
That's a great summation. It seems as though there's confusion as to what
constitutes loss aversion. IIRC, the original paper by Kahneman, Knetsch, and
Thaler [0] talked about losing something you had. Meanwhile, the posted
argument talks about whether someone is more or less likely to buy something
if the price goes up or down. These are such different situations! The first
is losing something you have, the second is deciding whether you want to trade
some money for a thing.

[0]
[https://www.aeaweb.org/articles?id=10.1257/jep.5.1.193](https://www.aeaweb.org/articles?id=10.1257/jep.5.1.193)

~~~
thatthatis
“The price will rise, but now” is the most tenuous loss aversion I’ve ever
heard of.

“You have a $10 credit, it expires in 2 days” would test loss aversion.

That consumers behave rationally in the face of price rises is an interesting
finding. But it’s a far cry from testing loss aversion.

~~~
snowwrestler
"Loss aversion" as a cognitive bias is not just the desire to avert any loss.

If it really is a general cognitive bias, it will show up as a difference from
expected statistics.

Imagine a held asset that has an even chance of going up or down. You'd expect
to see about half of people sell it and half hold it. A cognitive bias would
alter that ratio. If 75% of people sold it, and only 25% held it (despite even
odds), you could say that there appears to be a bias at work.

A great example of cognitive bias at work in the real world is the Monty Hall
3 door riddle. Most people get this wrong even though the math is not hard.

But simply avoiding a predicted loss is not "loss aversion" as a cognitive
bias. It's not even a bias at all; it's rational to avoid loss.

------
darkerside
This article is getting flamed pretty good. Here's another perspective I've
learned as a software developer. Building on incorrect abstractions is much
more damaging than redundancy in your code. It obscures the underlying design
that you're trying to unearth and model, leading others down a path with a
weak foundation. I think we're well served to narrow the scope of any
scientific finding beyond what might seem reasonable. The human mind is a
pattern identification machine, and it finds false positives in science as
often as it does in religion.

------
knn
I'm picking through the author's paper and I don't buy this conclusion. I have
a bone to pick with his evidence: for example, he makes a comparison between
"willingness to expend time to drive to obtain an accidentally left behind
unused, new-condition notebook (vs. willingness to expend driving time to
obtain a new notebook at no financial cost)". The extent of the former he
denotes as WTP-Retain and the latter WTP-Obtain. Even if these two values are
equal in a study, that doesn't contradict the principle of loss aversion. In
the case where a subject has already left behind his/her notebook, the loss
has already happened. How can this measure loss aversion when the loss has
already occurred? I think it's good the authors are trying to tease apart
action vs inaction from loss/gain but these conclusions don't seem valid to
me.

~~~
albedoa
He did that all throughout the linked article too: "People do not rate the
pain of losing $10 to be more intense than the pleasure of gaining $10." Okay.
That's not loss aversion though.

"People do not report their favorite sports team losing a game will be more
impactful than their favorite sports team winning a game." Same.

~~~
Spooky23
How to you rate pain like this? There is no metric for pain/pleasure per
dollar.

And there are other factors at play. Often the thrill is the dopamine release
when you make these decisions — that’s the pain. If you’re intensely
interested, losing $500 in Monopoly or scoring a run in baseball may be felt
profoundly.

It all depends on context, not the means by which we measure an outcome.

------
andybak
I do struggle sometimes to see how one could do proper science in the field of
psychology. It always seems like every experiment contains multiple hidden
assumptions, a myriad of uncontrolled-for variables and has more alternative
hypotheses that fit the data than you could shake a stick at.

Is this me being all Dunning Kruger? Is it my positivist bias obscuring my
vision? Have I misunderstood the nature of the scientific method or missed
some major aspect of practical epistemology? I sincerely hope so as the
alternative explanation regarding the nature and visibility of the emperor's
couture is rather upsetting.

I do genuinely think I am probably - at least partially - incorrect on this.
But I would like some help in shaking my sense of unease.

------
epx
The loss aversion is almost trivially explained by the marginal value theorem.
The subjective value of money is around log(money), that is, a meaningful
change takes an extra 0 in the paycheck or in the price tag.

So, if you have $200, getting $100 one thing, losing $100 is way worse, since
log(200)=2.30, log(200)-log(100)=0.3, log(300)-log(200)=0.18. A potential loss
of $100 must be rewarded by a gain of $200 to "feel" worthwhile if you already
have $200, since log(400)-log(200)=log(200)-log(100).

~~~
kashyapc
Something along those lines is what I recall reading in Kahneman's book. I
just double-checked the 'Loss Aversion' chapter, and indeed he writes, and
elaborates further:

" _What is the smallest gain that I need to balance an equal chance to lose
$100? For many people the answer is about $200, twice as much as the loss. The
"loss aversion ratio" has been estimated in several experiments and is usually
in the range of 1.5 to 2.5. This is an average, of course; some people are
much more loss averse than others. Professional risk takers in the financial
markets are more tolerant of losses, probably because they do not respond
emotionally to every fluctuation. When participants in an experiment were
instructed to "think like a trader," they became less loss averse and their
emotional reaction to losses (measured by a physiological index of emotional
arousal) was sharply reduced. [...]_"

~~~
mrob
>Professional risk takers in the financial markets are more tolerant of
losses, probably because they do not respond emotionally to every fluctuation.

Or more plausibly, because they're richer, and the utility they stand to lose
is smaller.

~~~
kashyapc
Good reminder. Although subconsciously I realize that, I didn't remind myself
that way and after re-reading that paragraph, I thought: "hmm, maybe I should
up 'risk-seeking' dial a bit more"—which can be evaluated independently,
though, depending on one's "risk profile".

------
throwawaymath
Hmm...

So here is an interesting thought experiment. Suppose you take a person with
some appreciable intelligence (at least average) but no particular knowledge
about a certain topic. In this instance, we'll let that topic be psycology.

Now we present this person with an unfortunate dilemma. For a particular
hypothesis, they observe a significant amount of peer reviewed literature
asserting empirical evidence in the affirmative. They don't have any real
familiarity with any individual papers, but they can understand that there's
an established consensus.

On the other hand they are given an article like this one, which mounts a
critical refutation of all the established literature. Furthermore, this lone
paper is presented to our stalwart examiner amidst the zeitgeist of a
reproducibility crisis. Thus we have a mountain of peer reviewed but
undigestible evidence on one side, and one readily digestible paper on the
other which specifically rebuts the mountain of evidence.

The fundamental dilemma is this: how should this person examine the available
evidence to maximize their chances of coming to the correct conclusion? Should
they abstain from trying to discern the truth of the matter, and strike out
any opinion they could have as unqualified? Should they read through the most
comprehensive surveys of available evidence to come to a full understanding?
Should they take the new, contrarian paper at face value?

There are a few dimensions here which (from my view) make the dilemma nearly
intractable unless you 1) abstain from an opinion, or 2) become a subject
matter expert. The cloud of the reproducibility crisis is a first dimension of
uncertainty - not only does that muddy the waters for existig research, but we
also have to be careful not take contradictory research at face value simply
because it's contrarian. For another, we have to figure out how to weight the
reliability of evidence against our own time. It's tempting to discount the
evidence of existing research if an especially compelling critique is
released, because we can more easily read it and follow its arguments.

It seems like this is enormously difficulty all around. How do we rate the
critical correctness of differing amounts of conflicting literature published
under academic uncertainty?

~~~
vkou
There is no alternative to 1) or 2).

You either have to follow consensus of the experts, or, to go contrary to
consensus, you must understand the consensus well enough to be one of the
experts.

Down any other road lies pop-sci nonsense. It's incredibly easy to be a wrong
contrarian, when you don't actually understand what you are attacking.

~~~
darkerside
What you call popsci nonsense is the way most of the people on this planet
live. Making decisions based on the available data and living with the fact
that we may be wrong. Nerds are a special class, and not better nor worse.

~~~
vkou
They are absolutely better at things they are experts on.

You don't hire a plumber to do a colonoscopy.

~~~
darkerside
Not better or worse in terms of value as human beings

------
boron1006
After reading the paper that this article was based on, this article and title
feel sensationalized. It's not that the evidence of loss aversion was wrong,
or statistically invalid, but just may point to different underlying factors
or psychological mechanisms.

However, this is just a couple of researcher's opinions, and tomorrow a
response article may come out saying that loss aversion IS supported by
evidence.

To me, this is the sign of a healthy science.

------
davetannenbaum
Interesting how their review omits the paper that has conducted the most
direct test of loss aversion:

[https://pubsonline.informs.org/doi/abs/10.1287/mnsc.1070.071...](https://pubsonline.informs.org/doi/abs/10.1287/mnsc.1070.0711)

Also they claim the body of evidence doesn’t find support for loss aversion.
But a meta analysis on the topic does in fact find support for loss aversion
(albeit the magnitude is probably smaller than originally thought):

[https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3189088](https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3189088)

------
lolc
I don't find the listed examples convincing. Especially:

> And people are not particularly likely to sell a stock they believe has even
> odds of going up or down in price (in fact, in one study I performed, over
> 80 percent of participants said they would hold on to it).

How naïve is that? We're not interested in what people said they would do. We
want to know what they did!

~~~
Cacti
Have you paid attention to either of the past US market busts, in 2000-2001
and 2008? People overwhelmingly ride it into the ground because of two things:

\- The fear of realizing a loss \- The unrealistic expectation of upside

Also, you'd be hard pressed to find a stock IRL that you could predict in
advance as "50/50" and see what participants do, wouldn't you?

~~~
gbear605
It seems like it would be fairly simple to design an stock market simulation
(with real money payouts) to test this.

~~~
Cacti
Either way it is not realistic. People losing a few cents on what they know is
a simulation is far, far different than people watching their life savings
evaporate in an uncertain environment.

Besides, the point of that particular study isn't a stock, it's that they have
a 50-50 chance of losing money they were just given. The stock is just a
placeholder for anything.

------
dosy
> However, this process advantages incumbent theories over challengers for a
> number of reasons, including confirmation bias, social proof, ideological
> complacency, and the vested interests of scientists whose reputations and
> even sense of self are tied to existing theories. A consequence is
> scientific inertia, where weak or ill-founded theories take on a life of
> their own, sometimes even gaining momentum despite evidence that puts their
> veracity in doubt.

A wonderful, concise summary of some of the human obstacles to the progress of
ideas, theories, stories and models about people and the world, scientific in
nature or not.

------
dosy
On the face of it, and with the benefit of hindsight if the paper's presented
theory is valid, if loss aversion as dominant motivation were a thing wouldn't
human civilization have never progressed beyond hunter gatherer nomads?

Doesn't the fact that we keep growing and progressing as a species even tho
the getting of these gains exposes us to risks, not just in the getting there,
but once we have arrived, the "curse/paradox of development", suggest that
loss aversion is _not_ a majority principle of human behavior?

But... maybe...gain attraction / gain pursuit _is_ a general
principle...perhaps of all life, not just ours? Maybe that's one of the
characteristics that tautologically has to define life. Life exists in an
uncertain environment and couldn't continue to do so without taking risks /
experimenting into that unknown.

~~~
wpietri
Not really. Loss aversion doesn't mean complete refusal to face loss or
complete lack of interest in gains, it just means that we weight losses more
heavily than gains. I also don't think anybody's claiming it's a dominant
motivation, just a common characteristic.

~~~
dosy
Interesting perspective. It doesn't really relate to how I think of it. Useful
to know that's how you think.

------
everdev
> People do not report their favorite sports team losing a game will be more
> impactful than their favorite sports team winning a game.

For fans of winning teams (Warriors, Patriots, etc.) I'm not sure if this is
true. They're expected to win, so watching them win can feel like nervous
relief or ambivalence but watching them lose can feel like disappointment.

I think we see loss aversion in soccer too where teams will often play "not to
lose" and "park the bus" rather than risk pushing forward and trying to win
the game but being vulnerable to counter attacks.

In video games however most seem to favor aggressive styles of play and loss
aversion is likely an instant loss.

I'm sure as with most social behavior loss aversion varies and depends on a
complex set of conditions. I'm sure in some contexts it's certainly at play
though.

~~~
nsmog767
I anecdotally agree with this. Since I learned about the concept of loss
aversion, I've noticed instances where I have to consciously force myself to
acknowledge opportunity cost, or the tangible loss dominates in my head.

------
MarkMc
The article's author David Gal claims that 'loss aversion' is a fallacy. But
in the book Thinking Fast and Slow, Daniel Kahneman says that the following
experiment demonstrates loss aversion.

\-----

People are randomly given one of two problems:

Probem A: In addition to whatever you own, you have been given $1,000. You are
now asked to choose one of these options: 50% chance to win $1,000 OR get $500
for sure

Problem B: In addition to whatever you own, you have been given $2,000. You
are now asked to choose one of these options: 50% chance to lose $1,000 OR
lose $500 for sure.

\-----

According to Kahneman, many more people will take the gamble when it is framed
as potential win (Problem A) rather than as a potential loss (Problem B).

So is Gal saying this experiment is not reproducible or that it doesn't
demonstrate loss aversion?

------
ggm
Economics as a pseudo science of emphatic statements about human behaviour is
looking pretty tragic.

~~~
jl2718
Behavioral economics exists only because psychology has completely lost
objectivity and focused on agenda. This article is a good example, uses
cognitive ‘proof’ for a behavioral hypothesis. Trash.

------
JackFr
I've long been skeptical of much of the behavioral economics literature. Not
that it's necessarily wrong, but that the experiments are so contrived that
they're difficult to generalize. But the pattern we see is, a contrived
example with undergraduate students given $20 bills or something, and then
cherry picking of anecdotal real world evidence.

It's easy to say that consumers and investors behave irrationally, it's harder
to tease out hidden factors in a rational utility/loss function that may
depend more on the expected value of one action.

------
jl2718
I think the whole point of Thaler’s assertion is that loss aversion is a type
1 bias, so will be demonstrated despite whatever people say when using their
type 2 reasoning.

------
danschumann
Losing money makes you a loser, gaining money is normal, so beyond the actual
event, there are identity things at play. In their terms, spending more on a
product or less, is not actually touching that identity, because both are just
being a spender. I agree about the consequences part: losing equals no roof vs
winning equals extra vacation. I think the rest is about the identity that
comes with losing.

------
neilwilson
Hypothesis: the set of people who want to see loss aversion refuted
intersection (sic) heavily with the set of people who want to raise taxes

------
Negative1
The author is the one "peddling" the idea that loss aversion is a phalacy but
at least he seems to (ironically) recognize that his argument is in itself
part of the social/argumentative part of science. Even so, this article seems
to draw conclusions as if they were widely held beliefs (I'm not qualified to
speak to these claims until I do my own research).

------
sacado2
Isn't the bias in loss aversion the fact that losing 50 bucks out of 100 isn't
symmetric to winning 50 bucks from a capital of 100? If I lose 50, I need to
double my new capital to recover my former position, but when I win 50, I
"only" need to lose 33% of my new capital. When I lose, relatively speaking,
I'm further away than when I win.

~~~
tomp
That would be risk aversion; the fact that marginal utility of money/wealth/
gains decreases as one gets more wealthy.

Loss aversion is the “fact” that “buy now to save 10$” is less motivating than
“buy now to avoid 10$ surcharge”, and that “here’s 100$; if the coin tails,
you lose $50” is more distressful than “here’s $50; if the coin heads, you
gain another $50”.

------
vezycash
The Ikea effect is a form of loss aversion. This alone shows that someone
hasnt done their homework.

"A bird in hand is worth two in the bush" is a popular saying with its
equivalent in almost every culture.

Diversification which is studied, recommended and practiced by almost every
investor, CEO, child... Is related to loss aversion.

There are many more real life examples of loss aversion.

~~~
watwut
Calculated strategies to prevent loss are not loss aversion as psychologists
use it. Neither is preventing catastrophic "I spend the rest of life in jail"
loss.

~~~
vezycash
Calculated or not, loss aversion is loss aversion. The principle, thinking or
motive behind diversification isn't investment growth. It's to prevent total
loss. I'm other words, loss aversion.

You said nothing about the Ikea effect.

Here's more.

Why do people stay in abusive relationships with individuals & companies? I've
put in so much, can't back off now. Scammers know and use this to great
effect. Once you've paid, you'll keep paying.

Why do investors rush to sell winning stocks but stick stubbornly to losing
losing stocks or trades?

The network effect is powerful because of loss aversion. "All my contacts,
friends, pictures are in..." so I can't switch.

LOSS AVERSION CHEAT SHEET.

Ask anyone for the reason behind an action. If the sentence begins with or is
dominated by, "I don't want" or "I didn't want..." the action was motivated by
loss aversion.

~~~
Jweb_Guru
This is not loss aversion and is explicitly covered in the article.

~~~
vezycash
Whether my example was stated explicitly in the article is irrelevant.

What's important is the primary motive behind an action.

In fact, strategy in military, business and soccer is divided into two -
offensive and defensive.

Offensive strategies are primarily motivated by gain. Defensive - by turf
protection, prevent loss of market, or prevent a goal.

Both strategies use similar, virtually the same tools. And like loss aversion
the difference is simply motive.

If China learns that Iceland is planning an attack on them and decides to
attack first, it's a defensive strategy.

Again, the key is motive. It doesn't matter what the action is, what matters
is why it's done.

If I kill someone for the heck of it (gain), it's called murder. If instead,
it's to protect myself (loss aversion) it's called self defense.

Limiting loss aversion to just financial behavior is a myopic view of the
subject.

~~~
watwut
The discussion is about loss aversion phenomenom as defined and used in
psychology. It is not about what you intuitively guessed from how it sounded
like to you.

But also, you horribly simplified military and soccer strategies too. Fun
fact: army can decide for offensive strategy, because defense would end up in
bigger losses. They may also go for defensive strategy despite bigger loss, bc
some other reason.

Lastly, no not every kill to protect yourself is self defense. That is not how
law and sentencing works.

------
Dowwie
Contrarian science is important if it can successfully refute a claim, but has
it in this case? Scientific American is sharing how the sausage is made (peer
review science), potentially before the final product is ready.

~~~
darkerside
It's not refuting a claim so much as narrowing it. I think we could afford to
do a lot more of this, especially in sciences where we've made questionable
amounts of progress.

------
tirumaraiselvan
Loss aversion, as it stands today, can be falsified in certain situations so
its obviously not writ in stone. What is required is even more study of the
context where it still holds.

------
james1071
a suggestion - loss aversion might be a manifestation of something else -
namely poor decision making under stress.The loss causes the stress, which
causes the poor decision making.

------
nyolfen
psychology as a discipline is not looking so hot these days

~~~
dang
Maybe not, but please don't post unsubstantive comments to Hacker News.

~~~
albertgoeswoof
I think this is a fair comment, it’s relevant and sparks an interesting debate
about psychology as an overall discipline. Not sure it’s fair to call it
unsubstantive.

------
modells
With the paradox of choice, most people are hypersatured with (the paradox of)
choices, opportunities and distractions... so any “loss” seems inconsequential
at the time because no one seems any more valuable than another. The key
fallacy of this attitude is that the world is a small place, life is finite
and will end. It doesn’t imply feverishly hustling every tiny opportunity, but
filtering and carefully exploring choices with a sound decision framework.

Also, most people rarely make rationally-beneficial decisions based on other a
myriad of fears, prejudices, laziness, negative cognitive distortions,
distractions or inadequate future-planning. Worse, most people are sold on
hype, feelings, gossip, peer testimonials and appearance when they can’t be
bothered to do due-diligence.

OTHO of gain avoidance/scarcity: You can put a “free” sign on a decent
household good, set it out, and it won’t move... put a price-tag of $100 on
and watch it get “stolen.”

tl;dr: The human condition is messy and imperfect... there’s no firm solution
except thorough qualitative hypothesis testing via experiences.

