As I write these words, I am already contemplating my New Year's resolutions, and my attempts to use the toolkit of behavioural economics grow ever more intricate. This year the enemy is “loss aversion”, a phenomenon identified by the psychologists Daniel Kahneman (a Nobel laureate) and the late Amos Tversky.
Loss aversion sounds like an odd label, because it might seem perfectly reasonable to be averse to losses. Technically speaking, loss aversion is something more than that: it is a disproportionate anxiety about losses. When we pass up excellent opportunities to make larger gains, purely because we are desperate to avoid small losses, that is loss aversion at work.
And it is rarely wise, since the difference between “losses” and “gains” is often rather arbitrary - a benchmark that is easily manipulated.