How Loss Aversion Shapes our Decision-Making

By Nishk Moorjani – Y12

A discipline to some that may seem useless when in actuality sheds light and fills in the gaps of classical theories, determining the straightforward yet complex and intricate methods that cause humans to act irrationally. Behavioural Economics uses external factors such as cognitive biases that influence human behavior in order to highlight the many instances in which individuals' actions deviate from traditional economic theories and subsequently cannot be explained using them.

Loss aversion is a cognitive bias in which individuals would prefer avoiding losses rather than acquiring equivalent gains. Humans perform irrational behaviours in their everyday life, and exhibit a strong aversion to losses, going to great lengths in order to avoid them. This may be why the emotion you feel losing $10 on a bet is a lot stronger than winning $10 playing a game. But the phenomenon does not just exist in our daily lives, they can have impacts on a larger scale in terms of financial decision-making. For instance, you may see Investors holding onto a poorly performing stock, hoping to avoid the incurred loss, when all the signs point to the most rational decision being to sell the stock in order to protect themselves from an anticipated further loss.

Why would you take a buy two get one for free offer when you went into the store only intending to buy one in the first place? Our brains are innate to avoiding as many losses as possible, which subsequently influences how we make decisions related to our assets. Consider these expensive extended warranties on most electronics that you purchase, the premise of it only exists based on loss aversion. You buy the insurance in order to avoid the losses of expensive replacement costs, even if the cost outweighs any expected benefits that you may incur.

Understanding concepts such as loss aversion can allow Policymakers to use them in order to maximise the benefit they incur by increasing the chances of desired behaviour occurring. The most prominent industry where this is present is marketing; why do you think when there is a sale you’re always told that you’re going to save 25% of your money rather than gain the 25%? Offering discounts and limited sales creates this fear of missing out among consumers, causing them to feel zealous about their potential purchase due to the highlighted scarcity of the product.

Financial decision-making can be strengthened by accepting loss aversion rather than ignoring its implications. Investors can adopt techniques that promote an equal relationship between risk and return by becoming conscious of the bias. Diversification of investments and precise goal-setting can lessen the psychological effect of losses and stimulate more rational decision-making. Therefore, individuals can be nudged towards making better judgments by designing effective initiatives and improving their well-being overall.

The area of behavioral economics is always developing, revealing unique biases and psychological truths. This can cause us to go closer to establishing a more precise and thorough model of decisionmaking, one that takes into account the intricacies of human psychology, rather than ignoring it.

Are we addicted to our devices?

By: Agata Savelyeva – Y10

With the first personal computer having been developed in 1974 and touchscreen phone in 1994, their influence on society has become almost inevitable. They have made our lives much more convenient, speeding up the transit of information, opening platforms and search engines with abundant wisdom, and connecting the world, not to mention the release of developing artificial intelligence. But have they disengaged us from reality?

The average American spends 7 hours and 4 minutes looking at a screen each day. Daily screen time has increased by nearly 50 minutes per day since 2013. So, considering there are 331.4 million American adults, in the past decade alone, the American population has spent 31,504.3 more years on their devices. Now, while this statistic may shock you, it is important to note that not all that time has been wasted. From commercially available 3d printers to AI, lis1braries of easily accessible information for anyone to prototypes of self-driving cars, a lot of societal progress has stemmed from the invention of computers. However, the convenience they present does bring about a different issue, addiction.

Addiction is a chronic dysfunction of the brain system that involves reward, motivation, and memory, and these were the principal concepts that were used while developing social media. While applications such as Meta and Twitter are focused on connecting people and sharing ideas, networks including TikTok and Instagram are designed to entertain, and these are the largest perpetrators when it comes to management of time.

An average TikTok user spends one and a half hours on the application daily, and beyond entertainment, there is no greater personal or public benefit. In addition to this, such apps are extremely detrimental to our attention spans. The algorithm is finetuned to each user, showing content that has been specifically tailored to your interests, constantly updating to keep you engrossed. This means that if you do not enjoy the 10 second video you are immersed in, you can simply skip it.

This is the issue.

The ability to skip something you don’t enjoy not only informs the algorithm of your choices, but also does not translate to reality. If you are stuck in traffic, or on a long plane ride, you cannot simply “skip” that experience, and the societal collapse of duration of concentration brings about many concerns. Not only does it make daily tasks more difficult, but it favors pleasurable activities over useful ones, increasing global lethargy and dictates out tendency to be overtly pedantic.

An example of this can be seen through global marital patterns. For example, since peaking at 65% in 1960, the percentage of women who were currently married has decreased to 31.3% as of 2020. Although there are a multitude of factors affecting marriage rates, such as an increase in education rates, a shortened attention span has been attributed to increases in divorce. If people struggle to assign moments of concentration to an activity, how are they to dedicate the rest of their days to their spouse?

To conclude, a rise in technology has solved many issues, but brough upon us a wave of new ones. It is now up to us to decide on how to manage our time and resist the tantalizing temptations of social networks.