Have you ever skipped asking for that raise because you didn't want to risk an awkward conversation? Or passed on applying to your dream job because you assumed you weren't qualified enough?
That's a classic case of loss aversion, and it's probably costing you more than you realize.
What is Loss Aversion?
Loss aversion is the psychological phenomenon where, in any scenario with something valuable at stake, humans tend to try "not to lose" rather than "try to win."1
A simple example of this is poker, a test of your ability to calculate risk and make decisions on the fly. Different pot sizes, or the amount of money at stake, have a huge effect on whether a player chooses to play or fold.
Given a solid hand with a decent-sized pot, a good player may choose to take a risk and continue betting in hopes that they have the winning hand, or that their opponents choose to fold.
Regardless of other factors, since you've already invested so much into the pot and the upside is high, you may as well continue betting.
But given that same hand, some players may choose to fold, thinking "oh, my opponents probably have better hands," even when they actually have no idea what the others hold. They don't want to continue putting money in the pot and potentially lose even more.
This is loss aversion: playing the game to "not lose any more money" rather than continuing to bet with the "try to win" mindset.
Humans encounter loss aversion everywhere in their daily lives—wanting to offer opinions and speak up at work but choosing not to out of fear of looking dumb; selling a stock that's up a lot because you're afraid the price will plummet soon;
Even taking the risk of approaching and talking to that girl you've had a crush on—assuming the worst without ever making an attempt.
I think all humans innately struggle with loss aversion. We're taught all our lives that failure is bad and that we should do everything in our power to avoid it. Think about our school systems, and how we push our whole lives to get the best grades, afraid to fail and actually learn.
How to overcome it
To be honest, I struggle with loss aversion every day, unconsciously avoiding certain "asymmetric" bets that I probably should take. And unfortunately, there isn't an end-all, be-all solution.
Take every day step by step and just do the thing.
Don't think about it; don't over-analyze it—just doing it, a lot of the time, will help you get past loss aversion. Because, let's face it, a lot of the time you actually know what you should be doing. It's just a matter of doing it and not thinking about the consequences.
No risk, no reward. And usually, the bigger the risk, the bigger the reward. Most of the time, it's 10 seconds of awkwardness or a lifetime of regret.
When the stakes are high, it's up to you to make the call. But, like Nike says, it's usually best to just do it.
-> Kyle
Footnotes
This concept was popularized by Daniel Kahneman and Amos Tversky in their work on prospect theory, which won Kahneman a Nobel Prize in Economics.
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