Thinking, Fast and Slow
Losses loom larger
Losing hurts about twice as much
Thinking, Fast and Slow, chapters 26 to 28
The same hundred hurts about twice as much going out as coming in. This page is about what that decides for you.
What actually happened?
The hardest finding in prospect theory is that losses loom larger than gains, by a factor most experiments put between one and a half and two and a half. Kahneman measures it with a coin toss: tails and you lose a hundred, so how much must heads pay before you will play? Most people want about two hundred. A chain of behaviour follows. People take the safe option over gains and gamble to avoid losses, they overvalue whatever they already hold, and every result is counted from a reference point.
The double weight is a thumb on the status quo
Any proposal that changes things has its possible losses silently doubled while its possible gains are counted at face value. Two options of identical expected value are not judged equally. To give change a fair hearing, put the cost of standing still on the table.
The case for replacing the old system counted migration risk and left out what another year of maintenance and forgone work costs. Written as a number, the scales level.
People who are behind start gambling
Faced with a certain loss, most people prefer a larger uncertain one for the chance of getting back to even. That is not weak character, it is the standard output of the mechanism, which makes an unrealised loss the most dangerous moment there is.
Three million down, and another two might save it sounds like resolve. Bring in somebody carrying none of the sunk cost to judge it.
Reference points can be set
Gain and loss are always relative to something. A bonus rumoured at thirty and paid at forty is a delight; rumoured at fifty and paid at forty it is an insult. Same money. Whoever controls the comparison controls what the fact feels like.
Quote high, then give the real price, and the client experiences a saving. Give the real price first and they experience a cost. Identical number.
How do I use it today?
Where you are: a proposal to change something feels far too risky.
Ask first: have you counted what staying costs? And are you sitting inside a loss right now?
Where it goes wrong: learning that reference points move and using it only on other people, or citing loss aversion as a reason never to change anything.
Lines to keep
Losses loom larger than gains.
Facing gains people take the safe option; facing losses they gamble.
A slow procedure catches what a fast individual cannot.
Same situation, other people are asking
Is switching tracks now too big a risk?Everyone's chasing the new thing. Do we have to?Two years in and I think it's the wrong thing.I know this is not it. Can I not just finish the year first?Do I change direction now · all 5 questions →If this one named what you are going through,
send it to someone who needs it, or keep it somewhere you will find it again.