April 3, 2015

What Is Loss Aversion and Why Should We Care?

oxfamamerica.org
Human beings are not always logical or predictable. We have a complex mix of thoughts and behaviors that means sometimes we make choices that baffle others.

There is one trait we all share: Loss Aversion. This is the tendency for people to strongly prefer avoiding losses, even over gains. In fact, this force is thought to be twice as powerful as acquiring gains. In simple terms, we hate losing what we've got, even more so than gaining something. If there is a risk of a loss or a gain, we are much more likely to do what we can to prevent a loss. Wikipedia notes, one who loses $100 will lose more satisfaction than another person will gain satisfaction from a $100 windfall. Loses and gains aren't equal.

This means we tend to avoid risk if there is the potential of loss, even if there is an equal or greater potential for gain. "A bird in the hand is worth two in the bush" is a cliche that applies. What we have we don't want to lose. This is why someone suffers a large loss on a particular investment in the stock market yet still has a very tough time selling the loser and moving forward. Even as the the losses mount we tell ourselves it might turn around. If we bail out now, the loss is permanent and our mistake is there for all to see.

For a satisfying retirement that can be problematic. By avoiding risk and allowing our loss aversion tendency to dominate we are likely to miss opportunities for new experiences and growth. We are so afraid of a change in the status quo we will remain fixed in place even if our rational mind tells us there is something better available.


My one word that I am attempting to focus on for 2015 is move. After a fall and early winter when I felt stale and lacking any forward momentum, the last month or two have shown me a way forward. As I write this our home has been sold and we have found a single story home closer to our daughters and grand kids. We also want to move to shake up our patterns and lifestyle a bit. After 30 years in one small section of the Phoenix metro we are ready for a change to a different part of town.


Loss Aversion has raised its head a few times during this process. I like our home, its location, and its warmth and comfort. I like our church and being near friends. I like our backyard a lot (so does our dog, Bailey). We are close to a large park that has it all. At times I hear that insistent voice saying to me, "Stay put. Don't move to something unknown."


That is the voice of loss aversion telling me to not risk a loss even if I may gain much more in the future. It is a siren call hard to ignore. But, ignore it I must. Betty and I have chosen to take this step. With my dad's recent passing we are reminded that our time on earth is not guaranteed past this one moment. By avoiding a risk of loss we are bypassing a world of possibilities and gains.

Loss Aversion is a power motivator. I am trying to make sure it is not a dominate feature of my future.


13 comments:

  1. I needed this today. Since we just bought a retirement place in Tucson, there are many unknowns. We will be going all the way across the country. Not near friends and not near family. It is quite scary. But we both feel in our hearts that this is what we need to do. To shake things up, do something different and enjoy one another again.

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    1. A move from Massachusetts to Arizona will be a major transition for you. My parents made the same move from Boston to the Phoenix area in 1989. They left a lifetime of friends and memories but wanted to be close to us and to be as far away as possible from snow and cold. Over time, they made three trips back East to see old friends, but they never regretted the move, even for a second.

      Frankly, the desert takes some getting used to, especially after the green of a place like your current home. But, most of us who have made that transition have fallen in love with the huge blue sky, the mountains, the incredible sunsets, the sunshine 320 days a year, and the lack of winter.

      You are starting a grand adventure. Welcome (soon) to the Grand Canyon state!





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  2. Well,I can share that making a huge move and giving up a home I also loved, and friends and shops and parks I was familiar with, WAS a shock! It was our CHOICE but yes, there are moments I miss a little of what I had. But the joy and sense of wonder and adventure of the move far outweighs the short moments of missing the familiar! It's natural to cling to what we have built, cherished and gotten comfy with.. but your sense of wanting to live life to the fullest has won out! So you and Betty will soon be stretching your friend-making muscles,finding a new church,parks for Bailey, and no doubt Betty will decorate the house beautifully and the yard will be planted with colorful plants that bring you Joy as you sip your morning cuppa.. Kudos to you for having the courage to make changes that are going to enrich the years ahead..

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    1. I do stare at our backyard and marvel at all the work and money spent to make it such a relaxing oasis - and wonder why I am going to do it all over again. But, then I watch as Betty picks out paint colors for the rooms of the new house, spins plans of a BBQ area, where to put our outside dining table, and laying out the perfect croquet setup for the grandkids and I know it will be fine.

      We still hope to make our RV trip to Show Low in a few weeks. When we get back it will be only 10 days until our move, but if we are packed and feel comfortable with everything we'd like to use that trip to relax and take a break. If it happens we will be passing through Payson at about lunch or coffee time. Maybe we can finally meet!

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  3. Bob, I will echo Roberta's comment, in that I also needed to read this post. I plan to give it to my hubby to read, too. We've always tried to live so carefully, that there are times I wonder if we've missed opportunities to expand our horizons. We are still 2 yrs away from full retirement, and it's never to late to change. I really admire your and Betty's courage. Your readers' comments inspire me, also. Blessings to all on this Good Friday and upcoming Easter. I just had a thought---aren't we all incredibly fortunate that the One who we celebrate this weekend, was so open and willing to living such an expansive life...and death?!!

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    1. I echo your thoughts regarding Easter and its meaning to us. Happy Easter to you and hubby as well.

      I am glad the post hit a chord. I was unaware of the phrase, loss aversion, until I was doing research for this post. It is a powerful force that we can probably never fully conquer, but can be aware of it and fight it when appropriate.

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  4. Your post struck a chord with me also as my husband and I, four years into retirement, find ourselves contemplating selling all and buying a motor home to live in full time. We hope to spend time near our son and family in the Seattle area, our daughter here in Colorado and four months someplace warm for the winter. I find myself excited at times and totally freaked out at others when I think of the big leap we may take. We'll probably rent a storage unit to store keepsakes, etc., but everything else will go. We've always wanted to travel and feel if we don't do it now while we're fairly young and healthy we'll look back with regret if we don't. By the way if you haven't discovered it yet, there's a great facebook-like site called RVillage just for RVers and wannabees. Lots of good people and information.

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    1. I am a member of RVillage!

      Read the web site, Wheeling It (link on left side of this blog home page) for stories from a couple that are full time RVers and have been for several years. This is always a lifestyle that has appealed to me but family pull is stronger.

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  5. Your words resonated with me this AM. I am a very cautious, no risk person and am learning to move! I retired a year earlier than I had planned, moved across the country to a warmer climate in Canada, leaving behind a few daughters and beloved grandchildren in exchange for a warmer climate and more central location for all four of my daughters and ten grandchildren. I miss the big city, the simple connection with my grandkids being in the same city. But, oh my, do I love where I have landed. After one winter I am hooked. I feel better physically without having to deal with a Canadian winter on the prairies but I think the biggest change was the retirement angle. I was addicted to my job. The money was a security blanket I had clung to since my single parenting days. I needed to let it go and live a healthy life in the next phase but it was not an easy decision. Now that it is behind me, I see all the gains, work around the losses, and keep my eyes forward as much as possible. With a much easier access to my west coast daughters and family, I embrace the trips to the Oregon Coast, family holidays on the west coast of Canada and visits back to the beautiful Alberta foothills. I also embrace the freedom for time to be creative, take on new things and move into a small town community where, it seems, my administrative background is much needed at the art gallery - OH BLISS! So, risking the loss gave me huge gains and the little regrets are minute in comparison. Thanks for your post - it reminded me to be grateful for the gift of courage to take on this change.

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    1. Thank you for your excellent example of why loss aversion cannot be allowed to keep us from something better. Your story will resonate with lots of us.

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  6. Bob,
    Not sure where this question should be located, but you mentioned moving to the desert from places with more water. Could you address the water situation there? How does it affect you and/or the average citizen in the Phoenix area? Is there a real danger of running out of water?
    Jeff in OK

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    1. That is an interesting question. Phoenix is certainly in the desert. Water is a precious resource that too few residents are willing to admit is limited. Over 200 golf courses, huge resorts, and plenty of lawns that must be watered at least once a day in the summer are helping to suck the Colorado River dry.

      Water rates in Phoenix are too low to force much in the way of conservation, and there is no public will to change. At some point, water will become treated as the life-giving force that it is, but not yet.

      In one regard Phoenix is luckier than Tucson. We are supplied by both the Colorado River and five large lakes that collect snow melt from the White Mountains. Tucson must rely largely on water pumped out of the ground. They are much less likely to waste water on green lawns because of the lack of other sources except the large canal that runs from the Colorado River. But, that leaves them more vulnerable to the future when the Colorado can no longer supply all of the Southwest.

      So, to answer your question directly, the typical Phoenix resident doesn't give water availability much thought, but I don't think water will ever run out. Before then mandatory water use controls and increased costs, coupled with hotter temperatures due to climate change, will keep Phoenix's population form continuing to grow (now over 5 million in the metro) and force those who do live here to live within their water means.

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  7. Thanks, Bob. It's good to get the perspective of a resident of the area.
    Jeff

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