People prefer to avoid losses more than earning equivalent gains.
<aside> ℹ️ We hate losing or letting go of what we have (even if more could be had). Prospect theory says that a loss hurts more than an equal gain feels good. In other words, losing $1,000 will "hurt" more than the joy of gaining $1,000. Loss aversion can also lead to Sunk Cost Effect . (Related: Endowment Effect )
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Loss aversion bias is a cognitive bias that describes our tendency to feel stronger negative emotions and have a greater desire to avoid losses compared to the positive emotions and desire we feel for equivalent gains. In simple terms, it means that we often fear losing something more than we value gaining something of equal worth. This bias can influence our decision-making and lead us to make choices that prioritize avoiding losses, even if it means missing out on potential gains.
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Loss aversion is especially common when we make financial decisions. An individual is less likely to buy a stock if there is a potential risk of losing money, even though the reward potential is high. Notably, loss aversion grows stronger as the stakes of a choice grow higher.
Additionally, marketing campaigns such as trial periods and rebates exploit our tendency to opt into a presumed free service. Once a buyer incorporates a specific software or product into their lives, they are more likely to purchase it to avoid the loss they will feel once they give it up. This tends to happen because scaling back—whether on software trials, expensive cars, or bigger houses—is an emotionally challenging decision.
Prospect Theory and Loss Aversion: How Users Make Decisions
Advances in Prospect Theory: Cumulative Representation of Uncertainty
