The FEAR of LOSS drives us more than the OPPORTUNITY to GAIN

This statement reflects a cognitive bias known as loss aversion; a concept often associated with behavioural economics.

In the context of human brain evolution, this preference for avoiding losses can be traced back to survival instincts. Early humans who were more attuned to potential threats and losses were more likely to survive and pass on their genes. As a result, the fear of loss became deeply ingrained in our cognitive processes, influencing decision-making and behaviour.

Loss aversion is a cognitive bias where people tend to prefer avoiding losses over acquiring equivalent gains. The idea is that the pain of losing something is psychologically more impactful than the pleasure of gaining something of equal value.

Example: Imagine you are given a choice between two scenarios. In Scenario A, you receive £100, and in Scenario B, you have a 50% chance of gaining £200 and a 50% chance of gaining nothing. Logically, both scenarios have an expected value of £100. However, due to loss aversion, many people would choose Scenario A because the fear of losing the guaranteed £100 in Scenario B feels more significant than the potential gain.

Loss aversion can influence various aspects of decision-making, including financial choices, investment behaviour, consumer decisions, and risk-taking. It is a fundamental aspect of prospect theory, which was proposed by psychologists Daniel Kahneman and Amos Tversky to describe how people make decisions under uncertainty. According to prospect theory, individuals weigh potential losses and gains asymmetrically, leading to risk-averse behaviour in situations where losses are possible.

Overall, loss aversion helps explain why individuals may exhibit conservative or cautious behaviour when faced with decisions involving potential losses, even if the potential gains are equal or greater.