# Loss Aversion ## The Idea in Brief People feel losses roughly twice as intensely as equivalent gains. Losing £100 hurts more than gaining £100 feels good. This asymmetry shapes decisions far more than rational models predict—we'll take irrational risks to avoid losses and pass up good opportunities to prevent potential downside. --- ## Key Concepts ### The 2:1 Ratio Kahneman and Tversky's research suggests losses are weighted approximately 2x more heavily than gains. A 50/50 bet to win £100 or lose £100 feels bad, even though it's mathematically fair. You'd need ~£200 upside to accept a £100 downside. ### Risk-Seeking to Avoid Loss People become risk-seeking when facing certain losses. Given a choice between losing £100 for certain or a 50% chance of losing £200, most choose the gamble—even though the expected value is worse. We'll gamble to avoid locking in a loss. ### The Endowment Effect Once you own something, you value it more than before you owned it. Sellers demand more than buyers will pay for identical items—because selling feels like a loss. ### Sunk Cost Fallacy We throw good money after bad to avoid "wasting" what we've already spent. The loss of admitting the initial investment was wrong feels worse than the continued losses from staying the course. --- ## Implications **In negotiation:** Show counterparts what they'll lose by not making a deal, not just what they'll gain. "If we don't reach agreement, you'll lose X" is more powerful than "If we agree, you'll gain X." **In strategy:** Loss aversion explains why incumbents are slow to cannibalise their own products. The certain loss of existing revenue feels worse than the uncertain gain of future revenue. **In investing:** Selling winners too early (locking in gains) and holding losers too long (avoiding the pain of realising losses) is the default behaviour. The disposition effect destroys returns. **In change management:** People resist change partly because any change involves losing the current state. Frame changes as avoiding future losses, not gaining future benefits. --- ## Sources - [[Never Split the Difference]] — "To get real leverage, you have to persuade them that they have something concrete to lose if the deal falls through" - [[Alchemy]] — Explains why "rational" economic models fail; people are loss-averse, not utility-maximising - [[The Most Important Thing]] — Howard Marks on why investors make asymmetric decisions; fear of loss exceeds desire for gain - [[Skin in the Game]] — Loss aversion is rational when you have skin in the game; survival is asymmetric - [[Better, Simpler Strategy]] — WTP is shaped by loss aversion; framing matters as much as objective value - [[Essentialism]] — The endowment effect explains why we overvalue commitments we already own - [[Wanting]] — The intensity of mimetic rivalry comes from loss aversion; we fear losing status more than we value gaining it