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Loss Aversion

Actualizado: 18 de feb de 2020

Refers to the tendency to value losses more than benefits. Psychologically, the magnitude of the dissatisfaction associated with losing a certain amount, on average across people, doubles the magnitude of the satisfaction linked to earning the same amount.

On the one hand, for example, experimentally-measured loss aversion can predict positions within firms: entrepreneurs are less loss averse than managers while both are less loss averse than employees. Companies who want to stimulate “intrapreneurship” as a key factor of innovation should know how loss averse their people are. Behavioral economics methods can help address this issue.

On the other hand, regarding the productivity of the workforce, it is known that it more acutely responds to bonuses posed as losses than to comparable bonuses posed as gains. Is your incentive architecture designed to maximize your people’s performance?

Kahneman, D., Knetsch, J. L., & Thaler, R. H. (1991). Anomalies: The endowment effect, loss aversion, and status quo bias. Journal of Economic Perspectives5(1), 193-206.

Tom, S. M., Fox, C. R., Trepel, C., & Poldrack, R. A. (2007). The neural basis of loss aversion in decision-making under risk. Science315(5811), 515-518.

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