Oftentimes, people make decisions that are not considered “rational” from a purely economic point of view. In other words, these decisions may not necessarily lead to the best outcome. But why does this happen? The answer lies within the phenomenon known as loss aversion. 

Picture yourself on a game show. As you land on the bonus space on your first round, you earn $1000. Now, you are given a choice. You could either take a $500 bonus guaranteed or flip a coin. If the coin lands on heads, you win another $1000 bonus; if it lands on tails, you win no bonus at all. In the second round, you earn $2000 as you land on the penalty space. But you are given another choice. You could take a $500 loss or try your luck at the coin flip. If the coin lands on heads, you lose nothing. However, if it lands on tails, you lose $1000 instead. Which choice would you make? 

Considering the phenomenon of loss aversion, if you’re like most people, you would probably choose the bonus in the first round and then flip the coin in the second round. However, if you were to reflect on these decisions, they lead to the same outcome. 

Under rational economic theory, our decisions should be based on a simple mathematical equation that weighs the amount at risk against the amount at stake. 

“For many people, the negative psychological impact we feel from losing something is about twice as strong as the positive impact of gaining the same thing,” said Sara Garofalo, a psychometrician and educator at TEDEd.

“Oftentimes, we as teachers will interact with students who made some irrational decisions. For example, [they] might take too many AP classes because they heard through some source of information that it’s important to have at least five AP classes,” said Mr. Kevin Fox, Arcadia High School AP U.S. Government teacher. “And in reality, they will take those AP classes and their overall GPA will decline because they took too many AP classes they can’t handle, or can’t manage, or they’re too difficult. Sometimes students will make a decision that is driven by one set of beliefs, but not based on the reality of the situation.” 

Loss aversion is a cognitive bias that originates from heuristic and problem-solving approaches based on previous experience and intuition, rather than careful analysis. These mental shortcuts can lead to irrational decisions, such as logical fallacies that can easily be proven wrong. 

Specific situations involving probability are notoriously bad for applying heuristics. A negative outcome would be the anchoring effect of the conjunction fallacy. The anchoring effect is when a person relies too heavily on pre-existing information to make decisions. It is often used in marketing and negotiations to raise the prices that people are willing to pay. Whereas the conjunction fallacy is an error in decision-making when the probability of an event is judged by the details used to explain it. Furthermore, heuristics are terrible at dealing with numbers. However, although heuristics may seem negatively impactful in decisions, they can still be quite effective. 

Throughout human history, survival depended on making quick decisions with limited information. When there is no time to analyze all the possibilities, heuristics can sometimes save our lives. However, today’s environment requires far more complex decision-making, and these decisions are more biased than we think, affecting everything from health and education to finance and criminal justice. 

“Humans value things; we have to rank them,” said Mr. Fox. “What’s more important to you? What’s second? What’s third? And oftentimes that chain of ideas doesn’t always serve people well.” 

Shutting off the brain’s heuristics isn’t possible, but people can learn to be aware of them. When facing a situation involving numbers, probability, or multiple details, take a second to pause and consider that the intuitive answer might not be the right one after all. 

Photo by Elisa Ventur