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Gains and Losses People hate losses (and their Automatic Systems can get pretty emotional about them).

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Roughly speaking, losing something makes you twice as miserable as gaining the same thing makes you happy.

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In more technical language, people are “loss averse.”

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How do we know this?

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Consider a simple experiment.13 Half the students in a class are given coffee mugs with the insignia of their home university embossed on it.

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The students who do not get a mug are asked to examine their neighbor’s mugs.

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Then mug owners are invited to sell their mugs and nonowners are invited to buy them.

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They do so by answering the question “At each of the following prices, indicate whether you would be willing to (give up your mug/buy a mug).”

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The results show that those with mugs demand roughly twice as much to give up their mugs as others are willing to pay to get one.

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Thousands of mugs have been used in dozens of replications of this experiment, but the results are nearly always the same.

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Once I have a mug, I don’t want to give it up.

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But if I don’t have one, I don’t feel an urgent need to buy one.

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What this means is that people do not assign specific values to objects.

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When they have to give something up, they are hurt more than they are pleased if they acquire the very same thing.

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It is also possible to measure loss aversion with gambles.

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Suppose I ask 34 HUMANS AND ECONS you whether you want to make a bet.

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Heads you win $X, tails you lose $100.

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How much does X have to be for you to take the bet?

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For most people, the answer to this question is somewhere around $200.

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This implies that the prospect of winning $200 just offsets the prospect of losing $100.

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Loss aversion helps produce inertia, meaning a strong desire to stick with your current holdings.

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If you are reluctant to give up what you have because you do not want to incur losses, then you will turn down trades you might have otherwise made.

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In another experiment, half the students in a class received coffee mugs (of course) and half got large chocolate bars.

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The mugs and the chocolate cost about the same, and in pretests students were as likely to choose one as the other.

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Yet when offered the opportunity to switch from a mug to a candy bar or vice versa, only one in ten switched.

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As we will see, loss aversion operates as a kind of cognitive nudge, pressing us not to make changes, even when changes are very much in our interests.