Loss Aversion

Once, while reading a book, I came across the term “loss aversion.” I didn’t know the meaning, but immediately I thought of the loss of our first house in Southern California. We had purchased a fixer upper with money we had saved over two years with both of us working 10 to 12 hours a day at the gym.

At the time our monthly budget for food and other necessities was Spartan—no movies, no buying books, no eating out. Through sacrifice, we were able to achieve the American dream. We were so excited that we had a place of our own, at last.

We fixed up the house ourselves, replacing the roof by borrowing a video from the local library entitled “How to Fix a Roof,” refinishing the floor, painting each room and the entire outside. Our clients would always comment that we smelled like paint and turpentine.

Then the Northridge earthquake damaged many of the houses on our street, including ours. Most of us didn’t have money for quick repairs, so in time the neighborhood became run down. When helicopters started flying over our house looking for drug dealers, and we heard gun shots a house away, we realized that we had reached a crossroads. With heavy hearts, we ended up taking a loss on the house, surrendering it to the bank so that we could continue our education.

On that day I looked up the meaning of the phrase that had triggered such an old memory:

In economics and decision theory, loss aversion refers to people’s tendency to prefer avoiding losses to acquiring equivalent gains: it’s better to not lose $5 than to find it. Some studies have suggested that losses are twice as powerful psychologically as gains. This leads to risk aversion when people evaluate an outcome comprising similar gains and losses: since people prefer avoiding to making gains.

So what did we gain that day when we sacrificed our first home and our dream? We gained the possibility of a new, greater dream—the fulfillment of our ambitions. We found renewed energy, excitement about the possibilities that awaited us, and freedom from our attachment to the idea of ownership. We knew that with liberation we could make a life for ourselves anywhere.

Sometimes I wonder where we would be if we had sacrificed our education to keep the house. I’ve seen this way of thinking in myself, my husband and others—the situations were different but the behavior seemed to be the same. What makes us act irrationally in the face of facts that tell us to do otherwise? You always have a choice.

I understood this phenomenon in many practical situations, especially related to my clients. Some examples:

• Certain clients had a problem with canceling their gym membership, even though they never went, often for years.
• Others could not stand to give up their personal trainers or classes, even though they had never really helped them.
• Fitness magazine subscriptions and books would pile up, even though no one read them. This would also happen with cooking magazines and cookbooks.
• Clients clung to everything from their old routines: protein powders, exercise equipment, workout tapes, etc.
• Those who lost weight (which is almost all of them) would hang onto old clothes, “just in case.”

So what is it in us that is so irrational and holds on to something that is useless, that doesn’t bring anything positive into our lives?

How do you recognize that you are in the state of mind of loss aversion? Are there any signs and what is the solution?

In all of these behaviors we can see the fatalist at work. Someone who is living in the past, who doesn’t have the courage to sacrifice an old dream or way of being for the new life that is struggling to emerge. This is why following a strong daily routine is so important—new habits are fragile, and this clutter can distract us and drag us back. Daily meditation, journaling, and following a concrete plan that you’ve set for yourself is crucial to keep your vision of the future alive.