Loss Aversion

In cognitive psychology and decision theory, loss aversion refers to people's tendency to prefer avoiding losses to acquiring equivalent gains: it is better to not lose 5 than to find5.[Quote from wikipedia]

Loss Aversion

We always promote insisting anytime. But is it true? Sometimes, it’s hard for us to choose giving up instead of insisting blindly which could help us stop losses timely. People who worry about losses always lose the most.

I believe most of us had such experiences. You bought one movie ticket but after you watched about 30 minutes, you found this movie didn’t interest you anymore. But what did you do? You chose to insist sitting there for over two hours and finished it in a bad mood. Why didn’t you give it up early? The reason was that you had spent the money on it and if you gave it up, you lost 50 yuan. The final result was that you spent 50 yuan and you watched a rotten movie.

The Nobel Prize winner Joseph Eugene Stiglitz advised us we should neglect the 50 yuan when we make a decision because we’ve spent the 50 yuan and it has become the sunk cost. In economics and business decision-making, a sunk cost is a cost that has already been incurred and cannot be recovered.[Quote from Wikipedia]

sunk cost

We should neglect the sunk cost when we make decisions but on the contrary, we always overweigh the sunk cost and invest more and more.
We were born to fear losing and dare to take a risk to avoid losses. We are sensuous animals who are easier controlled by our inner fears. Compared with the persistence motivated by the loss aversion, we need more courage to forget what we’ve invest and start from scratch.

Aside from the loss aversion and the sunk cost, it’s very hard for us to admit our mistakes and failure which is the first step to stop losses. If we don’t dare to admit our mistakes and failures, we won’t have the courage to forget the sunk cost and will get trapped into the loss aversion.