How is your decision-making affected by avoiding a loss and achieving a gain? – Chapter 28

In an experiment, people lying in a brain scanner were shown several images. Among them were pictures of the eyes of a happy person and of a terrified person. They were shown for a fraction a second: the participants never consciously knew they had seen the pictures. One part of their brain did know: the amygdala, the ‘treat center’. Brain images showed an intense reaction to the threatening picture. The same process makes us process angry faces (a possible threat) more efficiently and faster than happy faces. An angry person in a happy crowd gets noticed faster than the opposite situation. Our brains are equipped with a mechanism that gives priority to bad news.

Our brains also respond faster to merely symbolic threats. Bad words (war, murder),  emotionally loaded words and opinions with which you strongly disagree attract attention quicker than their opposites. Loss aversion is another manifestation of negativity dominance. Bad feedback and bad parenting proved to have more impact, and bad impressions and stereotypes are formed faster. As Gottman argues: long-term success of marriages depends more on the avoidance of negatives than on looking for positives. One bad action can ruin a long-term relationship. The boundary between good and bad is a reference point that changes over time and depends on the current situation.

People are driven more strongly to avoiding a loss than to achieving a gain. A reference point can be a future goal or a the status quo. These two motives have different strengths: loss aversion (not reaching the goal) is a lot stronger than the wish to exceed it. This explains why many people set short-term goals.

The different intensities of the motives to achieve gains and avoid losses show up in many situations. It is often detected in negotiations, in particular the renegotiations of existing contracts. Reference point: existing terms. Any proposed change is considered a concession (loss) by one of the parties. Loss aversion makes reaching an agreement difficult. 

A study on what the public considers unfair behavior by employers, landlords and merchants showed that the opprobrium linked to unfairness imposes constraints on profit seeking.

Reference point: the existing rent, wage or price. The participants deemed it unfair for stores to impose losses on customers, while the stores behaved according to the standard economic model: increased demand leads to a raised price. The latter is seen as a loss. Exploiting market power to impose losses on others is considered unfair. On the other hand, companies are entitled to retain current profit if it faces a loss by transferring the loss to customers or workers. Research shows that merchants who set unfair prices are likely to lose sales and that employers who are considered unfair have to deal with reduced productivity.