Wednesday, December 26, 2012

Cass R. Sunstein on loss aversion as a cognitive bias

The answer lies in one of the central findings of behavioral economics, which goes by the unlovely name of “loss aversion.” In short, the prospect of a loss focuses the human mind. Even if people don’t care a whole lot about gains, they will work hard, and possibly fight, to avoid comparable losses.
Bloomberg | Opinion
People Hate Losses and That Affects U.S. Budget Talks
Cass R. Sunstein

Loss aversion is recognized as one of the major cognitive biases affecting traders. It's also at the basis of the sunk cost fallacy aka "throwing good money after bad."

Obvious application in the fiscal cliff kerfuffle is middle class loss aversion when faced with benefit cuts. People hate benefit cuts even more than tax increases. If the president doesn't use this to his advantage and accedes to benefit cuts, he will have proved (again) that he is GOP lite. Of course, the Bloomberg piece sees it differently.

1 comment:

Critical Tinkerer said...

Loss aversion is at the core of inflation fears from printing money for deficit spending.