Dilbert does behavioural economics: Loss aversion

dilbert loss aversion

It is Dilbert time again!

In prospect theory which is a key concept in behavioral economics, the pain associated with a possible loss is much greater than the pleasure associated with a gain of the same magnitude. In the above strip, Dilbert’s garbage man clearly understands this concept much better than Dilbert.

In loss aversion if someone offers you a bet on a flip of a coin, where you gain USD 100 on heads and lose USD 100 on tails, then people will not take it, although the gain and the loss multiplied by the probability are exactly equal. In fact research shows that many people need to get close to twice the amount in gains, before they will take it!

So the interesting part is how this influences investments, sales, strategy etc. You are simply more committed to what you have than what you can gain and thus demand inordinate compensation for letting it go. For example for that reason investors will hold onto depreciating assets too long and be too slow in buying appreciating assets.

The last part is actually quite insightful – the power of behavioural economics comes from the fact that once you understand that you are influenced by it, you are able to do… nothing… These biases are systematic and predictable, because this is just human nature.

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