Book Cover

The chapters in Part 4 of Thinking Fast and Slow are relatively short and punchy, but the ideas aren’t small. I think these chapters are the most useful on a day-to-day basis.  Chapter 28 goes into depth on the concept of loss aversion. Loss aversion works because people evaluate outcomes as losses or gains, and losses loom larger than gains. If we consider the motives to avoid a loss or achieve gain, humans are driven to avoid losses than to achieve gains. Many of the cognitive biases we have explored earlier support the idea that our brains are wired to see threats above all else.  Threats include words (consider the reaction you get to words like transformation, transition, or change), they cause listeners to think of the possibility of loss which immediately invokes System 1 thinking.

This idea of loss aversion can’t just be tossed off as an interesting theory.  Every successful salesman I know (I know a few) understands that providing someone with a way to avoid pain, avoid loss, is a very powerful tool to guide behavior.

Most every organization, program or team use goals as a tool to guide behavior.  The concept of loss aversion is important to understand the behavior goals will generate. Kahneman states that people (and by extension teams) attempt to meet their goal because not meeting the goal would equate to a loss.  They are, however, not very motivated to exceed their goals because the gain is not as important as avoiding the loss. There is an asymmetry of the intensity motives; as leaders, we need to understand how to use goals so that we can help generate continuous forward momentum. Serial goals will tend to generate a sawtooth pattern of effort as goals are attained, lose their motivational aspect and are then replaced.  Perhaps a set of overlapping goals would provide a smoother flow of effort.    

Another aspect of loss aversion is the idea that when bargaining over a shrinking pie (a shrinking market perhaps) is, in reality, an exercise in the allocation of loss. These types of negotiations are very difficult and potentially painful. Alternately, negotiations over a growing pie are much easier. During the last economic downturn, the city I live in had to decide how to allocate a shrinking tax revenue stream across services.  It was painful for everyone, each department fought tooth and nail for “their fair share.” Fade to the current economic environment with decent revenue growth, budgets are passed by voice vote without much consternation because no one loses.  

Loss aversion is a conservative force. It helps stabilize the status quo.  Change challenges the status quo and increases the possibility that someone will lose. People that stand to lose will fight harder than those who stand to gain.

Remember, if you do not have a favorite, dog-eared copy of Thinking, Fast and Slow, please buy a copy.  Using the links in this blog entry helps support the blog and its alter-ego, The Software Process and Measurement Cast. Buy a copy on Amazon,  It’s time to get reading!

The current installment of Re-read Saturday:

The installments:

Week 1: Logistics and Introduction –    

Week 2: The Characters Of The Story –  

Week 3: Attention and Effort – 

Week 4: The Lazy Controller – 

Week 5: The Associative Machine – 

Week 6: Cognitive Ease – 

Week 7: Norms, Surprises, and Causes – 

Week 8: A Machine for Jumping to Conclusions – 

Week 9: How Judgement Happens and Answering An Easier Question – 

Week 10:  Law of Small Numbers – 

Week 11: Anchors – 

Week 12: The Science of Availability – 

Week 13: Availability, Emotion, and Risk – 

Week 14: Tom W’s Speciality – 

Week 15: Linda: Less Is More – 

Week 16: Causes Trump Statistics – 

Week 17: Regression To The Mean – 

Week 18: Taming Intuitive Predictions — 

Week 19: The Illusion of Understanding –  

Week 20: The Illusion of Validity –  

Week 21: Intuitions vs Formulas – 

Week 22: Expert Intuition –   

Week 23: Chapter 23: The Outside View

Week 24: Chapter 24 The Engine of Capitalism –

Week 25: Chapter 25  Bernoulli’s Errors 

Week 26: Chapter 26 – Prospect Theory  

Week 27: Chapter 27 – Endowment Effect