It was his book “Thinking Fast and Slow”, I believe, where he stated that humans are risk averse. He claimed they fear and mourn a financial loss (say, 100$) double as much as they rejoyce the same financial gain (cite in German, but I am sure you can easily find one in English). This has been quoted over and over and has been popular party talk, woven into all sort of anecdotes ever since. I think it is not true, and certainly not in this absolute form. It depends. On your personal circumstances, on your mood on a given day, on whether you really need 100$ to pay rent this month, on your cultural background, etc. etc. I did not buy it, and particularly the “double as much” part smelled like false mathematical rigour in my perception. What do you think?
With a free poll for all participants!
yes, I fear and mourn financial losses much more than I rejoyce financial gains
no, I rejoyce financial gains much more than I fear and mourn finacial losses
financial losses/gains cause a similar level of distress/joy to me
it depends on many circumstances, I can’t tell definitively
I am a masochist and tired of winning, I prefer to lose
0voters
Should including a poll disqualify this thread for Great Debates and condemn it to IMHO, I have no problem with that.
I thought this over and my first thought was no, that’s not me. I build for the long term. But despite my investments and job choices working out pretty well in my life, I really beat myself up over the small number of bad investments I made. So I voted yes.
In order for “twice as much” to even be meaningful, you need some way to quantify emotion. I doubt that he has that.
“More than” is probably definable, and he might be correct with that. The test, I think, would be if a person receives good financial news and bad financial news of the same magnitude at the same time: Are they overall happy or unhappy about it? But even there, I doubt it.
I fear and mourn a financial loss when it’s significant far more than financial gain. Example, having an unexpected $500 vet bill when it’s outside the budget is far more emotionally fraught than an unexpected $1000 windfall.
-Casual- losses, back to the $100 (which isn’t of course casual to many, but YMMV) are frustrating, but are more or less baked into the usual cost of doing business IRL. At which point, a casual financial gain (I found $20 in the road, or I got an unexpected dividend check for $40) is substantially more emotionally charged.
I chose the top option in the poll (i.e., Kahneman’s right, at least when it comes to me).
For me, it all comes down to quality of life. My quality of life is comfortable, so if you gave me an extra $100,000, it would be pleasant, but it’d take me a while to even figure out what to do with it. On the other hand, if you took $50,000 from me, I would immediately have to reassess my finances to figure out how to accommodate that loss. It would influence my emotions much, much, much more to lose $50k than to gain $100k.
Of course, that’s a pretty large amount. If I unexpectedly lost $12.50, that’s not going to influence my finances too much. But on the flip side, if I unexpectedly came into $25, that is such a small amount that would barely even cause a blip on my emotional radar.
I think it’s basically true in general, but of course it depends on many factors. The following article talks about (among other things) how it depends on “our neurological makeup, socioeconomic factors, and cultural background.”
The OP lumps “fear and mourn” together, but I wonder if there’s a useful distinction between how we feel about gains or losses that have already happened to us vs. how we feel about the possibility/risk of future gains or losses.
Our evolutionary history conditions us to notice threats with a greater level of attention and engagement than we notice things that are beneficial or neutral, because the things that are threats include those things that can end us - predators, enemies, venomous things, loss of important assets, loss of control, falls from a great height, etc. Whereas a failure to respond to something neutral or beneficial is a missed opportunity that, whilst it is still a negative outcome, is possibly correctible if the opportunity should present itself again later.
Or in simpler terms, you get many opportunities and second chances to pick this or that apple or collect this or that shiny or useful object, but you do not get any second chances to ignore the tiger.
So it makes perfect sense that we would perceive the loss of a sum of money (a threat) more acutely than the gain of the same sum (a benefit).
I do not think that risk aversion and the possibility of being eaten by a tiger are equivalent. Losing 100$ or losing your life are, I believe, not at the same evolutionary level. Kahneman oversymplifies that. It is tempting to do so, and a good conversation starter, but I think it is not true. I don’t see evolution operating that way.
I suspect there is some degree of USA-centrism in his reasoning.
That is an interesting distinction. Wonder how it could be measured.
ETA: Footnotes 1 and 13 in your link are… Kahneman and Tversky & Kahneman. Hm. Circular citing? If I disagree with Kahneman (and Tversky) it is no good to refer to them to convince me.
We maybe ought to be more careful to distinguish between risk aversion and loss aversion, although I’m not sure how big or important the distinction is.
You are right on that one: I meant loss aversion, though the articles I cited spoke about risk aversion. That was lazy of me. I should have been more careful, does not change my argument. But good and pertinent clarification, thank you.
I picked “it depends on many circumstances” because I have been very happy to get an unexpected few thousand dollars, but not bothered at all by having the value of my retirement account drop even more. I suspect, however, that if I had “lost” that money in some other way (lets say I was carrying cash to the ban and got robbed) I would be more upset about the loss than I was happy about the gain.
But Kahneman might be right- the fact that there are people paying for full coverage on 20 year old cars and buying $75 Apple care plans for $250 iPads suggests that I might not be the average person.
To me that suggests rather innumeracy, not that Kahneman’s argument is right. Sellers of insurance (which is in principle a good thing!) are savvy. They know to make money. It’s their job.
I’d presume that he was referencing a particular study which showed that people, in a research setting, had acted like this. More specifically, that the average across the participants had been at around a 2:1 ratio.
You aren’t the average person and your average situation is probably not quite as artificially constructed to (potentially) maximize the illogical response as the research setting environment did.
If Kahneman didn’t say what he was basing the statement on, then he’s at fault for that. But, probably, he did. If others stretched the idea out too far, that’s on them. Deciding that the description is wrong because you, anecdotally, don’t behave as irrationally as he has described, is also probably not a good way to approach what he wrote.
I would think so except that when someone mentions that to the people I know who do this , they know perfectly well that it doesn’t make financial sense. They are just afraid of having to come up with a couple of thousand for a new car or a couple of hundred for a new iPad. That’s really what they are insuring themselves against - the fear.
That is not irrational in itself, but if they do it consciously, it does not support Kahneman’s argument either. Though it leans that way.
I read Kahneman’s argument and feel, based on my perception (what else! - well, my wife’s perception, who happens to agree with me on this one), that it is not true, I go on and ask you, the Dope, what you think. I ask because I know I we may be wrong. What better approach do you suggest?