Why the Most Important Idea in Behavioural Decision-Making Is a Fallacy

Scientific American, 2018-07-31

What we are Led to Believe

  • People are loss averse, i.e. they experience more intense emotions when it comes to losing something (money, assets, etc.) than gaining an equal amount.

  • Preachers: Kahneman, Thaler.

What Actually Happens

  • This cognitive bias leading people to avoid losses more vigorously than pursuing gains doesn’t exist.

  • Messages appealing in terms of loss are NOT more persuasive than those appealing to gains.

  • Price increases (loss to consumer) are not more impactful than price decreases. [MK: price elasticity in microeconomics says otherwise, but it ignores the max consumption and saturation.]

  • Big financial losses can be more impactful [in terms of response] than big gains, but that’s individual risk management, not a bias.

  • Economists are humans, too, and tend to ignore evidence to the contrary.

  • The sunk cost effect (exists) may look like loss aversion, but loss aversion is a choice, and sunk cost has already happened.