Reasonable Loss Aversion

Science has confirmed it: you and I hate losing money more than we like winning money.  The term for our preference for avoiding losses is called “Loss Aversion.”  As it turns out, we loss averse people feel twice as bad in loss as we do in gain.  For example, if I lose $100 on a wager, I will feel sorrow twice as much as I would feel joy in winning $100.

According to economists, this is irrational.

I submit to you, however, there are many cases where loss aversion is tremendously rational.  Let’s imagine a world where money isn’t merely an abstract quantity, but is a concrete force of daily life, like, say, the real world.

You’re in Las Vegas and you have four thousand dollars to your name.  You decide to gamble.  You plan to risk no more than $1,000, since you have upcoming expenses that you must pay, such as rent, utilities, and other bills.  Losing more than $1000 would cause you to miss payments, which would put blemishes on your credit report.  Your job requires federal government clearances, and blemishes to your credit report could put those clearances, and your job, in jeopardy.

Recap:  If you were to lose more than $1,000, you would be unable to pay your bills, and may lose your job.  These are pretty serious consequences.

Now what happens if you win over $1,000?  Well, you may tuck some aside for later.  Perhaps you would treat yourself to luxurious dinners at a swanky restaurant on the strip.  You might go shopping and get that nifty electronic gizmo you had your eye on.  Who knows?  You’ve got a thousand bucks and you’re in Vegas.  You’ll find a way to have fun with it.

Now, let’s compare and contrast:  lose over a thousand dollars, miss bills and possibly jeopardize your job.  Win over a thousand dollars, and vacation got a little more fun.

Now I ask you, is loss aversion really so irrational?

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