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Brain Hack: turn your Loss Aversion Bias on its head

44 points by pmichaud 17y ago

petercooper 17y ago
The "hack" at the end is a nice touch, but the dilemma raised in the story he tells isn't really the loss aversion bias, but the sunk cost dilemma. Joe didn't set out to spend hours to get his $11 back. He thought it'd just take an e-mail to resolve it - easy. After that was unsuccessful, he thought it'd just be a phone call to resolve it - easy, no? Once he got far enough down this road, the sunk cost issue sank in (pun fully intended) because if he'd already spent an hour or two trying to get $11 back, he might as well not let that time spent "go to waste" and instead fight until he achieved success.
- pmichaud 17y ago
  You might be right. Loss aversion is closely related to the sunk cost fallacy. That's why I wrote this last week: http://www.petermichaud.com/essays/sunk-cost-fallacy/ http://www.petermichaud.com/essays/sunk-cost-fallacy/ And I have a post coming up that ties it together. Look for that next week sometime.
  - navanit 17y ago
    Are you planning to change or qualify this current post based on this thread?
pmorici 17y ago
I don't think his first example is good because it isn't just about a "loss" it's about feeling wronged. By the reasoning he gives we should just let criminals and murderers free because it costs more to jail them and give them a fair trial than it does to just let them be free and commit the occasional crime. The argument would be more persuasive if the example used had to do with something where it was a pure gain / loss as opposed to having a right / wrong component to it. I think the dating example was better, though that wasn't used as his central argument.
- CamperBob 17y ago
  True, it was a terrible example. The guy in the story obviously didn't care about the $11 and change, as much as he cared about seeing justice done. His impulse has value to society that far exceeds $11. Edit, re: By the reasoning he gives we should just let criminals and murderers free because it costs more to jail them and give them a fair trial than it does to just let them be free and commit the occasional crime. In some cases that does in fact make sense... 9/11 comes to mind. The price of living in a free society isn't $2 trillion plus incalculable collateral harm, it's losing a building and a couple of planes every once in awhile.
  - holiday 17y ago
    Perhaps, but the scam site probably didn't care about the $11 either. I can't see them in dispair, OMG Somebody claimed the $11 back Crime Doesn't Pay! This wasn't a serious attack on their "business model". The Loss Aversion Bias is also behind one of the classic mistakes people make when investing in stocks: holding on to a loser while the price goes down and down, unwilling to sell and accept the loss before it gets any worse.
    - pbhjpbhj 17y ago
      >Perhaps, but the scam site probably didn't care about the $11 either. I'd expect the scammers to have a chargeback, which can be just the difference but is usually the total value and again can be more with an admin cost added. They also get a black mark from the bank which could with repetition lead them to having their account closed (but probably not if they're making good profits for the bank). Banks don't like spending money that could be used for bonuses and so the admin costs are more significant and will turn the bank off their client quite readily. Edit: there's Bystander Effect in there too - why should I complain as it probably won't do any good because other people won't complain.
  - deleted 17y ago
    [deleted]
  - anamax 17y ago
goodside 17y ago
The actual studies by Kahneman and Tversky mentioned at the start are more interesting and solid than this handful of anecdotes. If you're not familiar with them, they might well be one of the most important things you've ever Googled for. The results: people weigh losses and gains with "1) a value function that is concave for gains, convex for losses, and steeper for losses than for gains, and 2) a nonlinear transformation of the probability scale, which overweights small probabilities and underweights moderate and high probabilities." This does little to convey the soul-crushing horror you will feel when you see these preferences demonstrated experimentally.
- paul 17y ago
  Do you have a particular link? Googling returns a lot of different things.
  - DXL 17y ago
    Try the paper(s) named (Cumulative) Prospect Theory.
    - realitygrill 17y ago
      Prospect theory has been around for almost 30 years and has it's own problems. But of course the experimental results are illuminating.. A good summary of these findings can be found in http://www.hss.caltech.edu/~camerer/ribe239.pdf http://www.hss.caltech.edu/~camerer/ribe239.pdf, the intro to Advances in Behavioral Economics (2003)
  - joe_bleau 17y ago
    I think this may be it: http://www.hss.caltech.edu/~camerer/Ec101/ProspectTheory.pdf http://www.hss.caltech.edu/~camerer/Ec101/ProspectTheory.pdf
fierarul 17y ago
I found the article mostly related to the sunk cost fallacy. Two of the the examples ($11 and the work overtime) are sunk cost fallacy since people don't know beforehand how long it's going to take and what the total gain/loss is going to be (how does one know beforehand that all the overtime will become a 10% wage increase?) I would discuss some more but it makes no sense to dissect so little material that seemed to be more confusing than enlightening to me. Of course, all this comment could be replaced by a downvote which doesn't exist here.
wallflower 17y ago
I think it comes down to no matter how logical you think you are, in a fear situation it's easy to protect yourself, take the personal loss of not putting yourself out there, despite the logical fact that you'd be better off in the long term by acting. Of course, sometimes you do act, against your rational holdbackness. That is the paradox of bring human. Sometimes it is better that we just act than think.
scotty79 17y ago
Author assumes that his friend didn't realize that he is at loss with the case which is unlikely. There are people who prefer to punish others that in their opinion misbehaved event at their own expense. Pleasure from punishing misbehaving one is greater for these people than loss that was necessary to deliver punishment. Money is no less virtual than pleasure from single person point of view.

44 points by pmichaud 17y ago

The "hack" at the end is a nice touch, but the dilemma raised in the story he tells isn't really the loss aversion bias, but the sunk cost dilemma. Joe didn't set out to spend hours to get his $11 back. He thought it'd just take an e-mail to resolve it - easy. After that was unsuccessful, he thought it'd just be a phone call to resolve it - easy, no? Once he got far enough down this road, the sunk cost issue sank in (pun fully intended) because if he'd already spent an hour or two trying to get $11 back, he might as well not let that time spent "go to waste" and instead fight until he achieved success.

pmichaud 17y ago
You might be right. Loss aversion is closely related to the sunk cost fallacy. That's why I wrote this last week: http://www.petermichaud.com/essays/sunk-cost-fallacy/ http://www.petermichaud.com/essays/sunk-cost-fallacy/ And I have a post coming up that ties it together. Look for that next week sometime.
- navanit 17y ago
  Are you planning to change or qualify this current post based on this thread?

pmorici 17y ago

I don't think his first example is good because it isn't just about a "loss" it's about feeling wronged. By the reasoning he gives we should just let criminals and murderers free because it costs more to jail them and give them a fair trial than it does to just let them be free and commit the occasional crime. The argument would be more persuasive if the example used had to do with something where it was a pure gain / loss as opposed to having a right / wrong component to it. I think the dating example was better, though that wasn't used as his central argument.

CamperBob 17y ago
True, it was a terrible example. The guy in the story obviously didn't care about the $11 and change, as much as he cared about seeing justice done. His impulse has value to society that far exceeds $11. Edit, re: By the reasoning he gives we should just let criminals and murderers free because it costs more to jail them and give them a fair trial than it does to just let them be free and commit the occasional crime. In some cases that does in fact make sense... 9/11 comes to mind. The price of living in a free society isn't $2 trillion plus incalculable collateral harm, it's losing a building and a couple of planes every once in awhile.
- holiday 17y ago
  Perhaps, but the scam site probably didn't care about the $11 either. I can't see them in dispair, OMG Somebody claimed the $11 back Crime Doesn't Pay! This wasn't a serious attack on their "business model". The Loss Aversion Bias is also behind one of the classic mistakes people make when investing in stocks: holding on to a loser while the price goes down and down, unwilling to sell and accept the loss before it gets any worse.
  - pbhjpbhj 17y ago
    >Perhaps, but the scam site probably didn't care about the $11 either. I'd expect the scammers to have a chargeback, which can be just the difference but is usually the total value and again can be more with an admin cost added. They also get a black mark from the bank which could with repetition lead them to having their account closed (but probably not if they're making good profits for the bank). Banks don't like spending money that could be used for bonuses and so the admin costs are more significant and will turn the bank off their client quite readily. Edit: there's Bystander Effect in there too - why should I complain as it probably won't do any good because other people won't complain.
- deleted 17y ago
  [deleted]
- anamax 17y ago

goodside 17y ago

The actual studies by Kahneman and Tversky mentioned at the start are more interesting and solid than this handful of anecdotes. If you're not familiar with them, they might well be one of the most important things you've ever Googled for. The results: people weigh losses and gains with "1) a value function that is concave for gains, convex for losses, and steeper for losses than for gains, and 2) a nonlinear transformation of the probability scale, which overweights small probabilities and underweights moderate and high probabilities." This does little to convey the soul-crushing horror you will feel when you see these preferences demonstrated experimentally.

paul 17y ago
Do you have a particular link? Googling returns a lot of different things.
- DXL 17y ago
  Try the paper(s) named (Cumulative) Prospect Theory.
  - realitygrill 17y ago
    Prospect theory has been around for almost 30 years and has it's own problems. But of course the experimental results are illuminating.. A good summary of these findings can be found in http://www.hss.caltech.edu/~camerer/ribe239.pdf http://www.hss.caltech.edu/~camerer/ribe239.pdf, the intro to Advances in Behavioral Economics (2003)
- joe_bleau 17y ago
  I think this may be it: http://www.hss.caltech.edu/~camerer/Ec101/ProspectTheory.pdf http://www.hss.caltech.edu/~camerer/Ec101/ProspectTheory.pdf

fierarul 17y ago

I found the article mostly related to the sunk cost fallacy. Two of the the examples ($11 and the work overtime) are sunk cost fallacy since people don't know beforehand how long it's going to take and what the total gain/loss is going to be (how does one know beforehand that all the overtime will become a 10% wage increase?) I would discuss some more but it makes no sense to dissect so little material that seemed to be more confusing than enlightening to me. Of course, all this comment could be replaced by a downvote which doesn't exist here.

wallflower 17y ago

I think it comes down to no matter how logical you think you are, in a fear situation it's easy to protect yourself, take the personal loss of not putting yourself out there, despite the logical fact that you'd be better off in the long term by acting. Of course, sometimes you do act, against your rational holdbackness. That is the paradox of bring human. Sometimes it is better that we just act than think.

scotty79 17y ago

Author assumes that his friend didn't realize that he is at loss with the case which is unlikely. There are people who prefer to punish others that in their opinion misbehaved event at their own expense. Pleasure from punishing misbehaving one is greater for these people than loss that was necessary to deliver punishment. Money is no less virtual than pleasure from single person point of view.