Gains and Losses People hate losses (and their Automatic Systems can get pretty emotional about them).
Roughly speaking, losing something makes you twice as miserable as gaining the same thing makes you happy.
In more technical language, people are “loss averse.”
How do we know this?
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.
The students who do not get a mug are asked to examine their neighbor’s mugs.
Then mug owners are invited to sell their mugs and nonowners are invited to buy them.
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).”
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.
Thousands of mugs have been used in dozens of replications of this experiment, but the results are nearly always the same.
Once I have a mug, I don’t want to give it up.
But if I don’t have one, I don’t feel an urgent need to buy one.
What this means is that people do not assign specific values to objects.
When they have to give something up, they are hurt more than they are pleased if they acquire the very same thing.
It is also possible to measure loss aversion with gambles.
Suppose I ask 34 HUMANS AND ECONS you whether you want to make a bet.
Heads you win $X, tails you lose $100.
How much does X have to be for you to take the bet?
For most people, the answer to this question is somewhere around $200.
This implies that the prospect of winning $200 just offsets the prospect of losing $100.
Loss aversion helps produce inertia, meaning a strong desire to stick with your current holdings.
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.
In another experiment, half the students in a class received coffee mugs (of course) and half got large chocolate bars.
The mugs and the chocolate cost about the same, and in pretests students were as likely to choose one as the other.
Yet when offered the opportunity to switch from a mug to a candy bar or vice versa, only one in ten switched.
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.