I can't trust anything in this article when its counterexamples are bogus and it doesn't cite evidence for its position.
Paying a higher price is not a loss. Loss is when you have something and lose it. Paying more money in exchange for a product is something else.
"You will lose out if you don't buy our product" is not a loss. It is lack of a gain, which is psychologically very different.
People's ratings of a $10 loss may not correlate very well with people's actions when faced with a $10 loss.
With this many basic errors, I can't make out whether the author's strawman has any substance or not. The author is hung up on things that could be logically equated to losses, which is bizarrely irrelevant when the effect under question is specifically about how people's actual behavior differs from logical behavior.
There are a number of related psychological and behavioural concepts which strike me as modestly-useful but wide-of-the-mark.
The Marshmallow Test -- an assessment of short-term vs. long-term trade-offs -- is one such case. It seems that the outcomes are far more reasonably explained by whether an individual has been exposed to a high-trust or low-trust environment, one in which promises are kept or broken. That is, even under controlled conditions, the cognitive priors the subjects bring to the experiment differ widely, and interpretations of claims differ.
Sunk cost strikes me as similar.
In the case of loss-aversion, there's the issue that under different circumstances, a given loss may represent a minor setback, an entirely inconsequential event, or a major, life-changing precipice. The distinctions are highly contextual, and depend on both personal background and circumstances.
This applies, incidentally, to organisations and firms as well as people. If you're flying along with ample cashflow, a $5 billion penalty (a magnitude recently experienced by a large tech firm) could be tolerable. If you're scating on a wing and a prayer, tight margins, and market perceptions subject to wild swings (say, as a short-term office-space "tech" startup headed by a dynamic leader with flexible moral and epistemic standards), a few well-timed blog posts might prove disruptive if not fatal.
"The Marshmallow Test -- an assessment of short-term vs. long-term trade-offs -- is one such case."
The problem with psychological research is that researchers assume they have thought of everything that could possibly occur to a subject, and that subjects take everything they are told at face value whenever necessary for the validity of an experiment.
Right, I'm aware of that though I may not have communicated the point effectively.
My read, and present understanding, is that the marshmallow test measures affluence-induced trust more than willpower.
(Though I suspect other factors continue to be at play, including environmental factors affecting cognitive development through chemical and behavioural dynamics, probably others as well. Complex system is complex.)
Your explanation of the marshmallow test does not contradict the common interpretation of it. Your explanation proposes a mechanism for why the test subjects differ during the test. The common interpretation only explains that the tested difference is correlated with future outcomes.
With anything to do with the brain (from sociology to physiatry and right through behavioral economics), we're really still deep in the dark ages. We know basically nothing and the fields themselves seem to be more about styles than objective truth or repeatability. Generously I assume that's because making measurements and doing experiments is as hard today as it was for scientists in the 10th century...
I'm not sure of the difference, but before I go look for educational material on how these phrases are used, obviously(?) risk is an abstract idea that we can never actually measure or demonstrate even in retrospect, whereas losses are a fact of life that everyone experiences. So it sounds very odd on the face of it to say loss aversion is irrational and risk aversion is not.
Would you say that evolution is fundamentally irrational? It's certainly unavoidable.
Loss aversion refers to a preference for "not getting something you don't have" over "losing something you do have", even when the thing you don't gain is worth more.
Worth more? Who considers value to be an objective thing? Certainly not any economist I've ever heard of. How could you have trade at all if value was objective?
But is it just protecting the organization, as one is typically paid to do, or is it an "irrational" decision? Science and math cannot tell you what the "correct" decision is without some reference goals, and the reference goals are probably subjective.
The most objective such can be that I can see is giving estimated probabilities to the owners of a company or org. Example: "Insurance policy X will reduce our estimated profits by 20%, but will also reduce our chance of going bankrupt in the next five years by 15%". Whether the owners/stakeholders want that trade-off is up to them. The universe otherwise doesn't "care" what your trade-off preferences are.
Per the article, that can't be true because you need to compare a loss with a gain. When you insure yourself you are merely sharing the inevitable loss with other people so that you don't get it in one big lump.
I don't understand the author's claim that the sunk-cost fallacy has nothing to do with loss aversion because,
"...[loss aversion] requires a comparison be made between losses and gains." Any consideration of sunk costs is an implicit comparison against what might be gained by investing one's resources differently.
Paying a higher price is not a loss. Loss is when you have something and lose it. Paying more money in exchange for a product is something else.
"You will lose out if you don't buy our product" is not a loss. It is lack of a gain, which is psychologically very different.
People's ratings of a $10 loss may not correlate very well with people's actions when faced with a $10 loss.
With this many basic errors, I can't make out whether the author's strawman has any substance or not. The author is hung up on things that could be logically equated to losses, which is bizarrely irrelevant when the effect under question is specifically about how people's actual behavior differs from logical behavior.