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Loss aversion may not be a psychological phenomenon, but it is definitely a real thing in most financial markets. The entire insurance and reinsurance industry

Loss aversion may not be a psychological phenomenon, but it is definitely a real thing in most financial markets. The entire insurance and reinsurance industry are based on loss aversion.

tabtab 7y ago
But is it just protecting the organization, as one is typically paid to do, or is it an "irrational" decision? Science and math cannot tell you what the "correct" decision is without some reference goals, and the reference goals are probably subjective. The most objective such can be that I can see is giving estimated probabilities to the owners of a company or org. Example: "Insurance policy X will reduce our estimated profits by 20%, but will also reduce our chance of going bankrupt in the next five years by 15%". Whether the owners/stakeholders want that trade-off is up to them. The universe otherwise doesn't "care" what your trade-off preferences are.
lordnacho 7y ago
Per the article, that can't be true because you need to compare a loss with a gain. When you insure yourself you are merely sharing the inevitable loss with other people so that you don't get it in one big lump.
benchaney 7y ago
Insurance is about risk aversion (which is reasonable in some cases), not loss aversion (which is completely irrational)
- perl4ever 7y ago
  I'm not sure of the difference, but before I go look for educational material on how these phrases are used, obviously(?) risk is an abstract idea that we can never actually measure or demonstrate even in retrospect, whereas losses are a fact of life that everyone experiences. So it sounds very odd on the face of it to say loss aversion is irrational and risk aversion is not. Would you say that evolution is fundamentally irrational? It's certainly unavoidable.
  - lonelappde 7y ago
    Loss aversion refers to a preference for "not getting something you don't have" over "losing something you do have", even when the thing you don't gain is worth more. It's nearly wholly irrational.
    - perl4ever 7y ago
      Worth more? Who considers value to be an objective thing? Certainly not any economist I've ever heard of. How could you have trade at all if value was objective?

Loss aversion may not be a psychological phenomenon, but it is definitely a real thing in most financial markets. The entire insurance and reinsurance industry are based on loss aversion.

tabtab 7y ago

But is it just protecting the organization, as one is typically paid to do, or is it an "irrational" decision? Science and math cannot tell you what the "correct" decision is without some reference goals, and the reference goals are probably subjective. The most objective such can be that I can see is giving estimated probabilities to the owners of a company or org. Example: "Insurance policy X will reduce our estimated profits by 20%, but will also reduce our chance of going bankrupt in the next five years by 15%". Whether the owners/stakeholders want that trade-off is up to them. The universe otherwise doesn't "care" what your trade-off preferences are.

lordnacho 7y ago

Per the article, that can't be true because you need to compare a loss with a gain. When you insure yourself you are merely sharing the inevitable loss with other people so that you don't get it in one big lump.

benchaney 7y ago

Insurance is about risk aversion (which is reasonable in some cases), not loss aversion (which is completely irrational)

perl4ever 7y ago
I'm not sure of the difference, but before I go look for educational material on how these phrases are used, obviously(?) risk is an abstract idea that we can never actually measure or demonstrate even in retrospect, whereas losses are a fact of life that everyone experiences. So it sounds very odd on the face of it to say loss aversion is irrational and risk aversion is not. Would you say that evolution is fundamentally irrational? It's certainly unavoidable.
- lonelappde 7y ago
  Loss aversion refers to a preference for "not getting something you don't have" over "losing something you do have", even when the thing you don't gain is worth more. It's nearly wholly irrational.
  - perl4ever 7y ago
    Worth more? Who considers value to be an objective thing? Certainly not any economist I've ever heard of. How could you have trade at all if value was objective?