Humans have an enormous aversion to loss. We fear and avoid loss far more than we seek gain.
Loss aversion primarily manifests itself in three specific forms:
Continuing to invest in something unprofitable simply because you’ve already invested in it.
Overvaluing something you own, believe, or have created simply because it’s yours.
Continuing to do something you’ve previously done in order to be viewed by yourself and others as consistent.
The Prospect Theory describes how individuals make decisions under uncertainty, emphasizing that people tend to prioritize avoiding losses over acquiring equivalent gains (loss aversion). However, their risk preferences shift based on the framing of choices—people are risk-averse when faced with gains but risk-seeking when facing losses…kind of crazy [and backwards] when you think about it. Another way to phrase it is that people tend to place a greater weight on potential for loss than the probability of gain when choosing among options. The pain of loss is more powerful psychologically than the joy of gain.
“The biggest risk is not taking any risk. In a world that’s changing really quickly, the only strategy that is guaranteed to fail is not taking risks.”
-Mark Zukerberg
“Whenever you see a successful business, someone once made a courageous decision.”
-Peter Drucker
“Taking risks doesn’t mean you don’t feel fear, acknowledge fear, or let fear inform you; you just don’t let it stop you.”
-Caren Merrick
“Prospect Theory is the best theory for describing the principles of our irrational decisions…People are drawn to sure things over probabilities, even when the probability is a better choice.”
-Chri Voss
