Without risk, there are no opportunities. Every decision you make, whether it involves changing careers, starting a business, or even investing in the stock market, is accompanied by some level of uncertainty.
The issue is that we frequently try to minimise the risks even though they may carry sizeable rewards. Loss aversion, a phenomenon, explains this paradoxical behaviour.
A cognitive bias known as loss aversion refers to the propensity to value a loss more highly than an equivalent gain. This article will explain how this bias operates and how to prevent it.Take personal finance as an illustration. Many people would rather save money than put it into the stock market. They assure themselves that if they keep it in a bank account, they won't misplace it.
They only neglect to account for inflation. They don't realise it, but by keeping their money in a savings account where the interest rate is less than the rate of inflation, they are losing purchasing power every day.
As a result, even though they make an effort to keep their money out of the stock market by keeping it in a low-yielding savings account, they still end up losing it.
And among many others, this is merely one illustration of loss aversion. This bias is also present in business innovation and career decisions, as we shall now see.
Companies tend to innovate less as they mature because it requires a certain amount of risk that they are not prepared to take. As a result, they choose a cautious approach to avoid losing what they spent time building.
Only eventually do young businesses arrive to disrupt them. Because they have nothing to lose and are driven to increase their market share, these businesses innovate and take chances.
These then gain momentum by providing more cutting-edge goods and services, which puts the large corporations that had been complacent about their accomplishments in difficulty. The latter experience market share loss and land in the predicament they initially sought to avoid. They consequently lose their place by making an effort to hold onto it.
Many people don't like their jobs, but they keep doing them out of fear that they won't have any other options.
They want to cry every morning when their alarm goes off. They take their time starting to work. Once they get to work, they complete dull tasks and go to dull meetings. They continue to keep a close eye on the time, eager for the day to come to an end.
They continue working at their jobs in order to avoid the suffering that would result from losing them, but by doing so, they make their lives more difficult.
Therefore, loss aversion causes us to make illogical, and occasionally even absurd, decisions. How then do we account for our seemingly paradoxical choices?