Is Avoiding Losses Actually a More Significant Motivating Force Than Realizing Gains?

For decades, psychologists and behavioral economists have proclaimed the importance of loss aversion, one of the most prominent cognitive biases identified by researchers. However, a recent thought-provoking article in Scientific American by David Gal challenges the conventional wisdom. Gal writes about the research he has conducted with David Rucker and published in the Journal of Consumer Psychology. 

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Gal argues that, "Loss aversion is essentially a fallacy." The statement surprised and intrigued me. Could it really be true that such a prominent theory was incorrect, and that a great deal of evidence existed to contradict it? Gal explains in more detail:

That is, there is no general cognitive bias that leads people to avoid losses more vigorously than to pursue gains. Contrary to claims based on loss aversion, price increases (ie, losses for consumers) do not impact consumer behavior more than price decreases (ie, gains for consumers). Messages that frame an appeal in terms of a loss (eg, “you will lose out by not buying our product”) are no more persuasive than messages that frame an appeal in terms of a gain (eg, “you will gain by buying our product”).

People do not rate the pain of losing $10 to be more intense than the pleasure of gaining $10. People do not report their favorite sports team losing a game will be more impactful than their favorite sports team winning a game. And people are not particularly likely to sell a stock they believe has even odds of going up or down in price (in fact, in one study I performed, over 80 percent of participants said they would hold on to it).

To be sure it is true that big financial losses can be more impactful than big financial gains, but this is not a cognitive bias that requires a loss aversion explanation, but perfectly rational behavior. If losing $10,000 means giving up the roof over your head whereas gaining $10,000 means going on an extra vacation, it is perfectly rational to be more concerned with the loss than the gain. Likewise, there are other situations where losses are more consequential than gains, but these require specific explanations not blanket statements about a loss aversion bias.

Perhaps most interestingly, Gal goes on to offer an explanation for why loss aversion has become such a prominent principle generally accepted by many scholars as truth.  He explains that another key cognitive bias, confirmation bias, has been a major factor. Scholars have tended to look for evidence that confirms and bolsters the theory of loss aversion, while dismissing or discounting contradictory or discordant findings. Other social forces too have helped to maintain and preserve the conventional wisdom. Gal concludes, "Wrong ideas can persist for a long time despite contrary evidence, and therefore, that there is a need to critically assess accepted beliefs and to be wary of institutional consensus in science and otherwise."