How to use your fear of loss for fun and profit

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Roll the dice

“Remembering that you are going to die is the best way I know to avoid the trap of thinking you have something to lose.” — Steve Jobs

Many years ago, there was a teenager named Erin who, while shopping for Christmas presents, came across a black dress that she just had to have. Having spent all her money on presents for others though, she no longer had enough to buy it. So she asked the store if they might put the dress aside until she could return the following Monday with her mother. The store said that would not be possible.

Disappointed, Erin went home and told her mother about the dress anyway. Much to her surprise and delight, Erin’s mother said that if she liked the dress that much, she would loan her the money until Erin could pay it back. After school the next Monday, Erin returned to the store only to find that she was too late. Someone else had bought the dress.

What Erin did not know until Christmas morning however, was that while she was in school, her mom had gone to the store and bought the dress as a gift. Despite the passage of time, Erin still remembers that Christmas as one of her fondest, and the dress is still a valued treasure—all because she had received what she once believed to be lost.

On a similar note, I still remember the intense wave of relief I experienced upon finding the wallet I thought I’d lost during a family vacation years ago.

What is it about losing something that makes having it again such a joy? To answer that question, Daniel Kahneman author of, “Thinking Fast and Slow” discusses an economic and psychological phenomenon called, “loss aversion.” Turns out, we humans are naturally loath to lose value that we already own—or think we own.

Consider, for example, the following gamble on the toss of a coin: Tails, you lose $100; heads you win $150. Would you accept the bet? Despite the possibility of gaining more than you could lose, if you’re like most people, you would not. As Kahneman states, “For most people, the fear of losing $100 is more intense than the hope of gaining $150.” Clearly, losses loom larger than gains.

But the really interesting question becomes: at what point do you take the bet? How much does the possible gain have to be in order for you to take the risk? Once you find this number for yourself, you’ve identified your personal “loss aversion ratio.” According to Kahneman, few people will take the gamble until the possible gain reaches at least $200, twice as much as the potential loss. This works out to a loss aversion ratio of 2.

So why do we avoid losses so much more than we seek gains? The answer might be found by looking at the problem from an evolutionary standpoint. If you have enough resources to survive, while an increase may be helpful, losing basic needs like food, water or shelter might kill you.

So what does any of this have to do with teaching and learning? A wise person once said, “If you really want to get something done, you’ve got three options: do it yourself, pay top dollar, or forbid your teenagers to do it.”

Let’s examine this for a moment through the lens of personal freedom. We humans hate to lose freedoms that we already have. For evidence of this, you need only look at recent sales since the possibility of gun regulation. Therefor, as parents and teachers, we should be very aware of the freedoms our children have—because it’s a heck of a lot easier to withhold something we’ve never given, than to take away something they already have.

Consider the impulsive sixteen-year-old. Is it easier to delay getting his driver’s license, or take the keys away later? Or what about that cell phone? Is it easier to wait until you’re sure your child can use it responsibly, or take it away after it’s been abused?

On the other hand, studies have also shown that the threat of a loss may also be a greater motivator than the possibility of a reward. It might sound cruel, but consider what might happen if instead of rewards for good grades, your child had to pay for bad ones. Or what might happen if you agreed to give a certain amount of money away if you did not accomplish a desired goal.

It’s a hardball psychological tactic. But sometimes, a little fear of loss might be just what we need to achieve the gains we desire.

Photo Credit: lumaxart via Compfight cc

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