Why We Care More About Losses Than Gains

Transcript

DAVID GREENE, HOST:

Next we're going to take a look at gains and losses and the very different ways in which we think about them. Each week, we discuss how psychological factors shape behavior with NPR's Shankar Vedantam. He's joined us again to talk about some new research that looks at how a common psychological bias even affects how the U.S. government makes policies. Shankar, welcome back.

SHANKAR VEDANTAM, BYLINE: Good morning, David.

GREENE: So what's the bias we're talking about here?

VEDANTAM: Well, it's called loss aversion and we've known about it for a long time, David. Let me just explain it very simply. Let's say you go to a casino and you plunk down a bet and let's say you lose $50. Now the question is do you leave or do you try and dig yourself out of the hole by gambling a little further?

GREENE: I, and most people probably, would stay and try to dig myself out of the hole.

VEDANTAM: Exactly. I spoke with Jeffrey Berejikian. He's a political scientist at the University of Georgia and here's how he put it.

JEFFREY BEREJIKIAN: You can do nothing and walk away and absorb that certain loss or you can gamble. And you know that the gamble is biased in the favor of the house. But there's some chance that you might win and get back to where you were before. When you frame choices in that way, human beings exhibit real consistent risk acceptance.

VEDANTAM: So the interesting thing, David, is that people seem much more willing to place the second bet than to place the first bet. And that's because with the first bet you're hoping to win something. With the second bet what you're really trying to do is you're trying to head off the loss and loss aversion theory suggests that the desire to avoid losses is wired more strongly into the brain than the desire to achieve gains.

GREENE: OK. So based on what we know about the brain, the drive to make up for losses, to get out of the hole...

VEDANTAM: Exactly.

GREENE: ...is much stronger than when you just walked in the casino and got started and made the first bet.

VEDANTAM: Precisely.

GREENE: We normally don't talk about policymaking when we talk to you, Shankar, but you're saying that this bias actually extends to countries.

VEDANTAM: That's right. So Berejikian and his colleagues, they've just analyzed 100 trade disputes between the United States and other countries.

GREENE: OK.

VEDANTAM: They divided these disputes into two groups. In one group, the U.S. was trying to open up a new market that had been closed to U.S. companies so there was a potential gain here in terms of markets and jobs. In the other groups, there was already trade between the United States and the other country where there was some kind of a dispute and the United States was arguing that the other country had clamped down in some way and that American companies were now losing market share and losing jobs as a result.

So one set of disputes was framed as a potential gain, whereas the other set of disputes was framed as a potential loss. Can you see the connection here with the casino?

GREENE: I think so. I mean, I don't think policymakers want to think of their jobs as playing the slot machine, but yes.

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GREENE: I mean, if you have lost jobs it's like you've lost money and you might want to try and make up for it.

VEDANTAM: Exactly. So what the theory of loss aversion will predict is that you will fight harder and longer when you're confronting a loss. And Berejikian and Early find this is exactly what happens at the national level. When a dispute is framed as jobs being lost, exactly like the guy in the casino, U.S. policymakers pull out all the stops and fight. Here's Berejikian again.

BEREJIKIAN: You should fight harder and longer in those areas where you expect to gain, more and we don't see that. The United States was much more willing to engage in an unproductive stalemate when there were unmet expectations. And what's important is that this didn't produce a better outcome.

GREENE: An unproductive stalemate. So we're saying that he found that the United States was willing to keep fighting for lost jobs. Even when it didn't seem like it was going to be productive, they were actually going to make up and get those jobs back.

VEDANTAM: Inherently, there's nothing wrong with trying to fight for a lost job. You know, there's nothing wrong with that.

GREENE: It's noble.

VEDANTAM: Yes, exactly. But the problem is what if one of the disputes involves saving 100 jobs whereas the other dispute involves gaining 1,000 jobs? The rational thing to do is to pay attention to the stakes and Berejikian and Early find that's not the case.

GREENE: When we talk about policymakers, though, couldn't there also be politics at play? I mean, if you're - even if there might be jobs gained elsewhere, the loss of jobs could make you look weak both at home to voters, abroad, to other countries.

VEDANTAM: It totally could, David. And I think part of the problem is that the voters are suffering from loss aversion too. So everyone is in the same psychological basket, so to say. You know, so the fundamental idea with loss aversion is that you're driving by looking in the rearview mirror. That's what loss aversion is. It's not a good idea when you're driving. It's not a good idea when you're gambling, and it's certainly not a good idea when it comes to national policy.

GREENE: Interesting as always, Shankar. Thanks a lot.

VEDANTAM: Thanks, David.

GREENE: That's Shankar Vedantam who regularly joins us to talk about social science research. And you can follow him on Twitter at hiddenbrain and while you're there you can also follow this program @nprgreene, @nprinskeep, and @morningedition.

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