Overcome the fear of loss

Risk aversion results in poor decision-making and lost opportunities

- Phil Slade

Why do we undervalue opportunity? The answer is simple. What we can do about it, however, is a little more complex. We undervalue opportunity because our basic survival instinct is biased toward avoiding negative outcomes.

In the early 1970s, two psychologists, Daniel Kahneman and Amos Tversky observed something peculiar while investigating people's gambling behaviour. They were interested in gambling because it seemed to fly in the face of the popular economic theory that we are all rational actors doing things primarily to advance our own self-interest.

What they found is that we tend to only take a gamble when the reward on offer is at least twice as large as the potential loss. People will risk $50 on the toss of a coin if the potential win is at least $100. Essentially, this is because the pain of a loss is felt much more acutely than the pleasure derived from a gain. So, if the coin toss was simply to either win or lose $50, then we would decline to take part in order to avoid the loss. This is loss aversion.