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Taking a chance on something new might sound exciting, but your gut intuition might tell you to make another choice.
This is an op-ed article. While we support other perspectives and diverse experiences, the views expressed by the author do not necessarily represent the opinions, voice, or stance of Psych Central.
It’s your lucky day! You meet a kind stranger who offers you a great deal.
She gives you $45, then asks if you want to keep that money or give it to her in exchange for a coin flip. If the coin turns up heads, she’ll give you $100, but if it’s tails, you’ll get nothing.
Which do you choose? Do you want $45 in your pocket now, or are you willing to take a chance on getting more money with the coin flip?
When I present this scenario to business audiences, about 80% say they’ll take the $45 from the kind stranger.
After all, taking the $45 is a sure thing. What if you took the risk and lost it just for a chance at getting the $100?
My gut reaction is to take the money and avoid losing out — a concept often referred to as loss aversion.
Loss aversion is a concept often associated with the “prospect theory” — a behavioral theory developed by Daniel Kahneman and Amos Tversky in 1979 to show that people react to the likelihood of losses or gains differently.
According to this theory, some people may be more concerned with the chance of gains than losses.
So when given the choice between taking the $45 or taking a risk on the $100, prospect theory says that while one person may choose the $45, another may take the risk of winning more than losing a little.
Loss aversion can occur when you avoid losing over gaining. You may take the $45 to avoid losing it rather than choosing to take the risk of gaining $100.
Scholars in cognitive neuroscience and behavioral economics refer to these choices as cognitive biases.
What explains loss aversion?
Consider the evolutionary context of our
During those times, there wasn’t a realistic way of saving resources for the future.
If a large animal was killed for food, the tribe would have to eat it before it rotted. The remaining meat couldn’t be used or stored for later.
Additionally, there was no way to carry an abundance of tools when the tribe migrated in search of better hunting grounds.
If risks were taken that caused a loss of resources, it might lead to death in the dangerous savanna environment. So human beings developed an intuitive aversion to losing resources than gaining them.
Our gut reactions retain this reluctance in our modern environment, despite the much lower danger associated with losing resources today.
Additionally, the banking system and the property laws enable us to accumulate resources, and the stability of modern life enables us to be relatively secure in this resource accumulation.
A cognitive bias can be considered an error in thinking that may affect our decisions and judgments. We can make these errors not only in work but also in other areas of life such as shopping and relationships.
A 2016 study suggests that our cognitive biases may be responsible for our tendency to make impulsive purchases.
When you see that fabulous jacket or outfit, you might buy it right then even though it’s not on sale, fearing that if you don’t get it then, it might not be available later.
Cognitive biases can also lead to distorted thoughts, which are irrational or exaggerated thoughts or beliefs that you may have. A 2020 study suggests that cognitive distortions are a “hallmark feature” of depression.
Well, let’s take a look at that scenario again.
The chance of getting heads is 50%, so you have half a chance of winning $100 and half a chance of walking away with nothing.
But imagine that you flipped the coin 10 times, 100 times, 1,000 times, 10,000 times, and then 100,000 times.
If you choose to flip it 100,000 times and win only half of the time, you’d earn $5 million. If you choose to take the $45 each time, you’d earn $4.5 million. So choosing $45 instead of taking the risk actually results in a loss.
The best choice — or rather the one most likely to not cause loss — is to choose the coin flip.
But this choice was first presented as a one-time deal, not a repeating opportunity.
What if I told you that it was a repeating scenario. You might have thought about it differently.
Our gut treats each individual scenario as a one-off, according to a 1992 study by psychologists Amos Tversky and Daniel Kahneman.
But in reality, we face a multitude of choices each day. Our intuition is to treat each one as a separate situation. Yet these choices form part of a broader repeating pattern where our intuition tends to steer us toward the negative.
Going against your cognitive biases might take an adjustment in your thought patterns. Reframing and redirecting the way you think can positively impact your behavior and mood.
Our lives are made of 100,000 coin flips. The stranger’s gift represents the series of opportunities we face in our lives when we 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.
If you just go with your gut instead of doing the calculations and going with the data, you may lose much more than you’d gain.
My research in this field shows that you can use pragmatic strategies to address these judgment errors.
To prevent your intuition from leading you astray, consider these strategies:
- Reflect on situations where you may have fallen for loss aversion in the past so that you watch out for similar circumstances in the future.
- Adopt a policy of letting the data lead you, instead of relying on your intuitions.
- For each decision that you face, envision it as a repeating pattern, instead of a one-time decision.
- Account for the role of uncertainty and take the course most likely to lead to the biggest gain.
Treating each choice as part of a broader pattern might feel counterintuitive, uncomfortable, and unsafe. Yet the course that feels most safe in avoiding losses might not be as safe as you think.
If you want to learn more about how your gut instincts might play a role in your business, financial decisions, and relationships, you can check out my blog on Wise Decisions through Cognitive Science.