Loss Aversion

We feel losses as more painful than equivalent gains, so we tend to avoid situations where losses could occur.

Human beings are naturally risk-averse, and that’s not always a bad thing. Fear of loss prevents us from making big mistakes. Unfortunately, it also prevents us from taking the necessary actions to achieve big wins.

This tendency is called loss aversion, and it can manifest in many ways, such as:

  • fear of losing tournaments
  • fear of rolling with tough competition
  • fear of investing
  • fear of leaving a stable job to start a business.

When we’re confronted with a risk we’re afraid to take, we need to:

  1. Determine if the loss is recoverable. Some losses are permanent, but many losses are not nearly as bad as you think. If you lose a tournament, you can always enter the next one. If you quit your job, you can always apply elsewhere.
  2. Calculate the risk versus reward. Spend some time thinking about whether the pros of the risk outweigh the cons, and approach the situation with rational data rather than just emotions.
  3. Treat loss like an investment. Understand that losing is not the opposite of loss, but rather a necessary precondition to achieve eventual success. Losing is part of the improvement process that will eventually lead to winning. See Investing in Loss for more details on this mental model.

Further study