Losses hurt approximately twice as much as equivalent gains feel good, making people risk-averse for gains and risk-seeking for losses.
This asymmetry in how we experience value is a fundamental feature of human psychology, not a bias or error. Losing $100 produces more psychological pain than gaining $100 produces pleasure. This explains why people prefer a sure $50 to a 50% chance of $100 (risk-averse for gains) but prefer a 50% chance of losing $100 to a sure loss of $50 (risk-seeking for losses). Loss aversion drives the endowment effect, status quo bias, and the disposition effect in investing.
Investors hold losing stocks too long (selling means realizing the loss) and sell winners too quickly (locking in gains). People reject positive expected-value bets because the potential loss looms larger than the potential gain.
Loss aversion is irrational and should be overcome—it's a fundamental feature of how we experience value, and sometimes it's adaptive (losses often have more severe consequences than equivalent gains).
How does loss aversion explain why people are risk-averse for gains but risk-seeking for losses?
How does understanding loss aversion improve the effectiveness of habit tracking from Atomic Habits?
Logically equivalent choices produce different decisions when framed differently (as gains vs. losses, or with different reference points).
PrincipleContinuing an endeavor because of previously invested resources (time, money, effort) that cannot be recovered, even when continuing is irrational.
PrincipleFast, automatic, unconscious cognitive processing that operates through pattern recognition and associative memory without deliberate effort.
Mental ModelSlow, effortful, conscious cognitive processing required for complex calculations, unfamiliar tasks, and deliberate reasoning.
Mental ModelThe tendency to rely too heavily on the first piece of information encountered (the anchor) when making decisions, even when it's arbitrary or irrelevant.
PrincipleJudging the frequency or probability of events by how easily examples come to mind, leading to overestimation of vivid, recent, or emotional events.
PrincipleJudging probability by similarity to stereotypes or prototypes, while ignoring base rates and sample size.
PrincipleWhen faced with a difficult question, System 1 automatically substitutes an easier question without conscious awareness of the switch.
FrameworkLasting behavior change comes from shifting your identity (who you are) rather than focusing on outcomes (what you achieve).
from “Atomic Habits”
A specific plan that states when, where, and how you will execute a behavior: 'I will [behavior] at [time] in [location].'
from “Atomic Habits”
Pair an action you need to do with an action you want to do to make habits more attractive.
from “Atomic Habits”
Behavior change operates at three levels: outcomes (what you get), processes (what you do), and identity (what you believe).
from “Atomic Habits”
Identity changes through accumulated evidence: each habit execution is a vote for the type of person you want to become.
from “Atomic Habits”
Losses hurt approximately twice as much as equivalent gains feel good, making people risk-averse for gains and risk-seeking for losses.
Investors hold losing stocks too long (selling means realizing the loss) and sell winners too quickly (locking in gains). People reject positive expected-value bets because the potential loss looms larger than the potential gain.
Loss aversion is irrational and should be overcome—it's a fundamental feature of how we experience value, and sometimes it's adaptive (losses often have more severe consequences than equivalent gains).
Loss Aversion is explored in depth in "Thinking, Fast and Slow" by Daniel Kahneman. Distilo provides a deep AI-powered analysis with key insights, audio narration, and practical frameworks.