Loss Aversion explains our tendency to strongly prefer avoiding losses over acquiring gains. Humans are instinctively averse to loss of any kind. We try to avoid losses at all cost whatever the situation. It is for this reason that we tend to be risk averse when making choices preferring safer options.

Loss aversion is the tendency to prefer avoiding losses when compared to equivalent gains. The principle is a powerful influence principle in the field of economics. What differentiates loss aversion from risk aversion is that the use of a monetary payoff often depends on what was previously expected to happen or be experienced. Some psychological studies have suggested that losses are in fact psychologically twice as powerful, as any respective gains.

In real terms, loss aversion implies that if someone loses $200 they will lose more satisfaction than the same person will gain in satisfaction from a $200 windfall. If we apply this to marketing and in particular the use of trial periods and rebates – both of these attempt to take advantage of the buyer’s tendency to value any products or services bought more after they incorporate it in the status quo.

It also important to consider what is considered a loss and what is considered a gain. Whether a transaction is perceived as a loss or a gain is important to this identification. Equally, how a price is framed can also have an impact of consumer behavior. For example, you could label something as having a discount or avoiding a surcharge may amount to the same thing but yield different results. 

 Although behavioral psychologists may categorize this as the “endowment effect”, and all other effects of loss aversion, to be completely irrational, it is important to the fields of behavioral finance and marketing. 

Socio-economic factors also play a factor in our disposition to loss aversion, with social hierarchy proving to be a good indicator of a consumer’s level of loss aversion. It has been found that people in power are actually less loss averse and one reason cited for this is that these kinds of people are typically in a better position to accept a loss if it should incur, due to their wealth, status and network and their ability to recoup any losses relatively easily. 

As a result, people in positions of power give less weight to losses than the average person. Even more fascinating this that people in positions of power and certain higher levels of wealth actually give more value to gains than people in less senior or wealthy positions.

An interesting caveat, however regarding wealthy people and their levels of loss aversion can be impacted by their social environment. A study conducted in Vietnam found that the wealthier villages were less loss-averse than poor villages. But in contrast, wealthy individuals, who lived in poor environments, were actually more likely to be loss averse than poor individuals who were living in a more affluent village.

As a result, an individual’s socioeconomic status or environment can actually prove to be extremely influential in relation to their level of loss aversion. People with a higher than average income level, living in wealthier villages, were found actually found to be less loss-averse. Furthermore, wealthy people or people in positions of increased power or authority were more willing to take risks. This socioeconomic mix of traits all influences our loss aversion, and our willingness to take on risk when making decisions.