Pain of loss Vs Joy of gain
Circa 2002. Cognitive psychologist Nobel Kahneman is awarded the Nobel Prize in Economics. So, what’s the big deal given that the prize is given every year to someone?
He was the first psychologist to win the coveted prize!
The inherent value in his research was the proof that decisions are not ruled by logic but by psychological principles that govern the perception of decision problems and the evaluation of options. One of the psychological principles that heavily impact human decisions is Loss Aversion.
Imagine India was going to experience an outbreak of a deadly disease that will kill 600 people and there were only two options for combating it.
Option 1: This option guarantees that 200 of the 600 people will live
Option 2: This option provides a one-third probability that all 600 people will live, but it also comes with a two-thirds probability that no one will live.
Which one of the two options would you choose?
I know you would have chosen Option 1. Most participants in Kahneman’s research chose Option 1.
Here is another set of options. Courtesy Kahneman again.
Option 1: This option guarantees that 400 people will die.
Option 2: This option provides a one-third probability that no one would die and a two-thirds probability that 600 people would die.
Which of these two options would you choose?
You chose Option 2, I know. Most respondents also chose Option 2.
Did you realize a minor shift in the way the options were worded has considerably changed the choices that were made? In both scenarios the options are identical!
Though the mathematical probabilities did not change, what was modified was how the options were framed. You just rejected the options that emphasized the loss. And so did most in Kahneman’s research.
Long story short, we feel the pain from losses about twice as much as we feel the joy of equivalent gains.
Think about two scenarios. You gain Rs. 10,000 in a lottery. You lose Rs. 10,000 in the same lottery. Which one impacts your emotions harder? Exactly!