Afraid to Lose? Conquer Your Loss Aversion for Long-Term Gain
It’s your lucky day! You meet a kind stranger who offers you your choice of a great deal: something for nothing. No tricks, really—you’re getting a free lunch. He gives you $45. Then he asks if you want to keep that money, or give it back to him in exchange for a coin flip. If the coin lands on heads, you’ll get $100. If it’s tails, you’ll get nothing.
Do you want $45 in cash, or are you willing to take a chance with the coin flip?
Whenever I present this scenario to business audiences, about 80 percent say they would take the $45. So do most people in studies of similar choices. $45 is a sure thing, after all, whereas trying for the $100 risks losing it all.
As one of the many cognitive biases hard-wired into our brains, many of us suffer from loss aversion. We simply do not want to experience loss. Driven by our feelings and fears, we avoid short-term losses and take what seems like a safer bet. But this is a dangerous error in judgment: We fail to take worthwhile risks, and we also lose more over the long term.
Running the numbers, the chance of getting heads is 50 percent: It’s either heads or tails. That means in half of all cases, you’d win $100. In the rest, you wouldn’t win anything. That’s equivalent to $50 on average, versus $45. In other words, you’re already ahead.
Now imagine you flipped a coin 10 times; 100 times; 1,000 times; 10,000 times; and then 100,000 times. At 100,000 times, you would get $5 million on average if you chose the coin flip for $100 each time, versus $4.5 million if you chose to take the $45 each time. The difference: a cool $500,000.
Choosing that $45 is a loss, then. Were this a repeating scenario, the better choice would be to choose the coin flip as a gift. And your benefactor did not say anything about its being a one-time deal or not. Had you known this was a repeating scenario, would you have thought about it differently?
Here’s the problem: Research shows that we treat each individual scenario as a one-off. But in reality, we face a multitude of such choices daily—and these choices form part of a broader repeating pattern in which our intuition tends to steer us toward losing instead of gaining. According to cognitive neuroscience and behavioral economics studies focusing on cognitive bias, this loss aversion causes us to make the same mistake no matter the arena, whether in life, relationships, or work. But recent research in these fields shows that using practical strategies can overcome the trap.
In work, it starts with evaluating where cognitive biases are hurting you, your team, and the organization, then employing structured decision-making methods to make sound daily decisions, effective important decisions, and superior major decisions. To implement these decisions well and create solid, strategic plans takes honing certain mental skills, such as being able to notice and avoid the trap of cognitive bias, make measured predictions regarding the future, and allow for alternative scenarios.
Your professional life is a long line of coin flips—and that stranger’s gift represents the series of opportunities we all face in our lives. We can either win $5 million or $4.5 million, depending on the decisions we make each time we’re presented with the choice.
The same applies on an organizational level. Let’s say your company has an annual revenue of $50 million, and a healthy profit of $7.5 million. Regardless of the choice you’re making, if other employees in your organization are just going with their gut to avoid losses, and the company loses 10 percent of its revenue or $5 million per year, then two-thirds of your profit will be wiped out, leaving only $2.5 million.
Daily, you face a series of situations where you need to decide whether to take the course that feels most comfortable by avoiding losses, or the course that feels less comfortable and leads to more gains over time. We’re not talking about huge bet-the-company risks—those require a different approach—but the kind of small decisions that add up to large sums over time. If you just go on gut instinct of doing the calculations and going with the data, you are likely to lose much more money by not taking the course that feels most risky.
To prevent your intuition from leading you astray, adopt a policy of letting the data lead you, instead of relying on your intuitions. For each decision you face, envision it as a repeating pattern instead of a one-time decision Run the numbers, account for the role of uncertainty, and take the course most likely to lead to the biggest profit.
Treating each choice as part of a broader pattern might feel counterintuitive, uncomfortable, and unsafe. But on the contrary, over the long term, it’s actually safer.
Dr. Gleb Tsipursky is a cognitive neuroscientist and expert on behavioral economics and decision-making. As CEO of Disaster Avoidance Experts, he has consulted and coached hundreds of clients worldwide, including Aflac, IBM, Honda, and Wells Fargo. His academic career includes seven years as a professor at Ohio State University. He’s appeared in Fast Company; CBS News; and CNBC, Inc. He authored the best-selling “The Truth-Seeker’s Handbook.” His latest book is “Never Go With Your Gut: How Pioneering Leaders Make the Best Decisions and Avoid Business Disasters.” Learn more at disasteravoidanceexperts.com, and on Twitter at: @gleb_tsipursky.