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Posts tagged ‘Loss aversion’

Loss Aversion & Trains: The Psychology of Gaining and Losing an Aisle

I recently took the train from Chicago to New York. It was long, uneventful and fairly dull. I got lucky though. A few hours before we arrived in New York’s Penn Station, the person who had been sitting next to me since Chicago got off the train; I suddenly had the whole aisle to myself. There was so much space I might as well been in first class. This got me thinking: what if I began my trip with all that space, and gained an aisle mate a few hours after Chicago? Would I have had the same reaction if the opposite happened?

I think it’s obvious – absolutely not. I would’ve been much worse the other way around. But why?

As humans, we have a deep psychological tendency to handle equivalent gains and losses differently. Almost always, a loss feels more detrimental than an equivalent gain. For example, most people find that losing a $50 bill is more agitating than finding a $50 bill is gratifying. Psychologists call this tendency loss aversion, and it helps explain a lot of irrational economic behavior. Bad investors exemplify this. Often times when an investment goes down, they tell themselves that they will sell it as soon as it goes back up. But when it continues to drop, their loss aversion kicks in and causes them to hold onto the investment even longer, which ultimately results in losing a lot of money. This is referred to as “chasing a loss,” and it typifies our tendency to assess equivalent gains and losses differently.

Loss aversion is connected to another psychological tendency called framing, which anyone familiar with the psychology of decision-making should know. Here are a few examples: would you rather buy meat that is 85% lean, or 15% fat? Would you rather opt for an operation that has a 90% survival rate, or a 10% mortality rate? Would you rather get a $5 discount, or avoid a $5 surcharge? You get the idea. We don’t assess equivalent losses and gains equally.

Back to my train ride. The question that kept me up was not if I would have reacted differently to my seatmate leaving late versus arriving early, it was why I would have reacted differently. I think the answer rests in my loss aversion. The reason I felt such a sense of joy when he left rests in the fact that I gained something – the aisle. On the other hand, I would have been annoyed if he would have sat down a few hours after we left Chicago because I would’ve felt as if I lost something – the aisle. Here’s the key, in both scenarios I would have experienced the same amount of time with the aisle to myself. The only difference is that in one case I gained something and in the other case I lost something.

The other question is whether or not loss aversion is an “irrational” behavior. If our standard for rational behavior is the Adam Smith version, then yes, loss aversion would be irrational. However, in the hunter-gatherer lifestyle to which our genetics evolved for, loss aversion seems perfectly rational. For example, let’s say you are on the African savannah and you have a stash of food you’re trying to protect. As one author says, “having twice as much food is not necessarily twice as valuable; food is perishable and one can only eat so much of it.” In this case, it would be a good idea to treat equivalent gains and losses differently; it is ecologically rational as some have said. In other words, “the brain’s built-in loss aversion bias is probably a carryover from the days our primate ancestors made decisions that involved resources that didn’t obey the tidy linear relationships of monetary wealth or the simple maxim, the more, the better.”

Clearly, loss aversion has its pros and cons, and whether it is rational or irrational depends on what your standards are. But it does help to explain a lot of things that aren’t necessarily related to economics, like my experience on the train.

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How to Explain the Disaster at Tenerife

On March 27, 1977 the deadliest disaster in aviation history took place on the Spanish island of Tenerife. In the midst of take off, going approximately 160 mph, KLM flight 4805 collided with Pan Am flight 1739 half way down the runway, killing 583 people. The KLM captain was Jacob Van Zanten, KLM’s chief flight instructor who had just returned from a six month safety course for commercial pilots. The subsequent investigation concluded that Van Zanten took off without clearance, thereby causing the crash. How could such a credited and experienced pilot make such a catastrophic mistake?

The events that preceded the accident were a recipe for disaster. A terrorist bomb had exploded at Gran Canaria International Airport, forcing several planes to divert to Tenerife, a small airport not used to handling large commercial jets. The control tower was understaffed, their English was weak, and a heavy fog had set it that prevented Van Zanten and his crew from seeing no more than 300 meters. All of these inputs contributed to Van Zanten making the fateful decision to takeoff without permission from the control tower.

The accident was also very preventable. Van Zanten could have doubled checked with the control tower or waited for the fog to lift. However, his emotions got the best of him and his lack of patience cost him his life, and the lives of others. An expert with years of experience makes a rookie mistake and turns out to be flat-out wrong. Why?

It turns out that there are a lot of answers to this question (mistakes and errors, especially those having to do with the aviation business, are hot topics in the popular psychologist literature), and I have seen the Tenerife disaster comes up in three books: The Invisible Gorilla (p. 20), Being Wrong (p. 303), and Sway (p. 10-24). While Invisible Gorilla and Being Wrong mention Tenerife anecdotally, Sway spends several pages explaining the anatomy of the disaster with three principles:

Loss aversion (our tendency to go to great lengths to avoid possible losses), value attribution (our inclination to imbue a person or thing with certain qualities based on initial perceived value), and the diagnosis bias (our blindness to all evidence that contradicts our initial assessment of a person or situation).

Sway’s explanations seem good enough, but it bothers me to see something like an airline disaster be explained by a few psychological principles. In isolation, each of the three principles make sense and have been empirically demonstrated a number of times. However, when it comes to something much more complex, like an airline disaster involving a huge number of inputs, I am skeptical of the explanatory power of a few psychological tendencies. In other words, aren’t there more forces at work than loss aversion, value attribution, and the diagnosis bias?

What about confirmation bias – the tendency to look for what confirms our beliefs and to ignore what contradicts our beliefs while disregarding the truth.You could say that in the minutes before van Zanten took off he only looked for indications of a safe take-off and ignored indications of a dangerous take-off.

Then there is cognitive dissonance – the tendency to hold on to an erroneous belief in the face of overwhelming contradictory evidence i.e., doomsdayers. You could also say that as van Zanten became more committed to taking off, it became increasingly difficult for him to change his mind.

Could there be more? Or are we missing something?

The point I am driving at here is similar to the one I made a few posts ago regarding Joshua Bell. That is, what does it mean for psychology to explain real-world phenomena? Put differently, what does it mean for something to be “explained” or “understood?” (and keep in mind van Zanten wouldn’t be able to help us nearly as much as you think, self-reports are almost never accurate.) I don’t know; but it is important that the popular psychology literature doesn’t get too gung-ho with their psychological explanations. 

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