Loss Aversion: "I Hate to Lose more than I Love to Win".

chrischez (25)in #cryptocurrencies • 7 years ago (edited)

Loss Aversion

A lot of people may have heard the quote orginated by Jimmy Connors: "I hate to lose more than I love to win". Obviously, most people enjoy winning more than losing and this fact will not be the discussion for this post. The question of interest for this post will be: is there scientific evidence that suggests losing evokes a higher negative affect on an individual than winning evokes positive affect?

A study by Kahneman and Tversky (1984) proved exactly this phenomenon and it was termed Loss Aversion. Specifically they describe it as follow: "In general, loss aversion favors stability over change". In easy words, It is better to NOT lose 5$ than to find 5$.

This phenomenon also seems to be present in some primates. In 2005, experiments were conducted on the ability of capuchin monkeys to use money. After several months of training, the monkeys began showing behavior considered to reflect understanding of the concept of a medium of exchange. They exhibited the same propensity to avoid perceived losses demonstrated by human subjects and investors.

But why is this the case?

Neuroimaging studies show that, while reward anticipation is associated with ventral striatum activation, negative outcome anticipation engages the amygdala which also plays a key role in emotions such as anxiety or fear. So from a biological perspective one could assume, the affect caused by norepinephrine as a result of fear or anxiety during a loss, is stronger than the affect of dopamine during a gain.

Another explanation might be that the role of amygdala in loss anticipation suggests that loss aversion may reflect a Pavlovian conditioned approach-avoidance response that results in the perception of a higher negative affect during losses.