• Eve Arnold

Why Avoiding a Risky Decision is a Risky Decision

Our whole lives are one decision after another.

“Losses loom larger than gains”(Kahneman & Tversky, 1979)

You hate losing. We all do. No one wants to be picked last in gym class, no one wants to come bottom of the class in Math and no one wants to be last in the social ladder of success. The bottom rung sucks. From a human perspective, it’s obvious why we don’t want to come last. Because it looks bad. We don’t want to lose because that will make everyone think that we’re not the sharpish tool in the toolbox and critically that leads to the thing we hate the most. People not wanting to be friends with us.

From that first time you enter the playground eagerly trying to make friends to that first day at work where you are trying to find someone that looks friendly that you can befriend and lean into for support. Us humans rely on support networks to feel connected and feel like we are safe, part of the tribe.

Rewind about 2 million years ago and it makes sense, you were likely to be part of a tribe and your chances of survival was increased if you were part of a large tribe with good hunting instincts. If you weren’t part of the tribe and you were on your own, you were left to fend for yourself. Which meant your chances of survival became severely reduced. Fast-forward to today and not a great deal has changed.

Although it might not look like it, you are still trying to get into the tribe and hunting for food, the playing field have just altered slightly. Swap out hunting for finding a job and trade tribal acceptance for the number of connections on LinkedIn and you’re pretty much in the 21st century. But can you influence your instincts and use them to propel you to make decisions that can benefit you? Well, let’s see.

How do we know we hate losing? Decision Time

Well like I said before it comes from a natural instinct to protect our selves. Ourselves in this case is that you want to preserve self-image in order to maintain status. If you appear like you aren’t doing so well on social media, let’s say you have a crappy car, still live at home and have student debt up to your eyeballs (just fyi I’m sat in my parents house writing this, my car has clocked 105,000 miles and I have a wedge of student debt). Let’s say you told everyone about this on social media. The fear would that people wouldn’t want to hang out with you anymore, that maybe by default they’ll become less successful. You know the saying “you are the sum total of your 5 closest people” well people might not want you in their circle if you have aren’t ‘making it’.

But over and above just the natural urge to appear to be doing well. You know, cars on finance, renting above your means and buying fancy clothes to impress people. Actually there turns out there is scientific evidence to support this idea that you are likely to try to avoid loss. Back in 1979 two brilliant chaps called Daniel Kahneman and Amos Tversky coined the term ‘loss aversion’ in a paper about probability. This term was to explain a phenomena in their research. They found that when participants were presented with the gamble of gain $100 or loss $100, the gambler will avoid loss when presented with equivalent gains. In other words, it’s better to not lose $20 than it is to find $20 on the floor.

It’s an important finding because it helps us understand how people make decisions in circumstances that have differing levels of certainty. What is clear is when the choice is uncertain people try to avoid loss where possible.

What is it about losing that’s so bad? Three big reasons – decision time

1. Biology

One answer lies in our biology. It seems logical that the following argument has some weight:

“For an organism operating close to the edge of survival, the loss of a day’s food could cause death, whereas the gain of an extra day’s food would not cause an extra day of life (unless the food could be easily and effectively stored).”

If you keep what you’ve already got, in theory, you won’t fall below where you are currently, a level that you’ve become accustomed too.

2. Environment

Another answer lies in your environment. A study by Ena Inesi, an Associate Professor of Organizational Behavior at the London School of Economics found that people in power are less averse to losing. There are several theories for this. One could be that people in power have accomplished a level of environment and status that they are assured by it.

In other words, if they were to lose, they wouldn’t fall too far down the ladder to mean they wouldn’t be able to climb back up. With a certain level of power and income comes certainty. For instances, if you have paid off your mortgage you may feel like taking a risk and quitting your job, after all, if it doesn’t work out, you know you only have to huddle together $600 to cover bills every month and you’re fine.

But if you are shelling out $3000 per month on bills, mortgage, childcare etc. it’s unlikely that you will be able to stomach the loss if it goes badly wrong. That makes you more averse to losing.

3. Culture

Finally, Culture is also said to play a key role in avoiding losses. Dr Mei Wang surveyed groups from 53 different countries in the attempt to understand if the culture had an impact on how loss-averse people were. The results? Eastern European countries tended to be the most loss-averse and people from African countries being the least loss averse.

One reason for this could be the difference between the communities involved and their cultures. Those individuals in collectivist cultures i.e. ones with strong family and friendship ties are more likely to take a risk. An argument for this could be that if there was a loss as a result of a risky decision, the individual has a strong network to lean into in order to absorb consequences if necessary.

In contrast to that, an individual in an individualist society i.e. not many close friends and weak family bonds may feel like they do not have a community to lean into. So if they were to make a decision that leads to a loss, they would feel a lack of a safety net and therefore the loss is intensified.

We are all but the sum of our habits, good or bad

“Most of the choices we make each day may feel like the products of well-considered decision making, but they’re not. They’re habits.” — William James, 1892

For you trying to start a new habit this is of critical importance. Perhaps you have a desire to start a side business but feel like the downside is too tough to stomach.

  1. What if you fail?

  2. What if you lose money?

  3. What if everything thinks you’re a loser?

A habit is something that it takes a while to master. For you, if you’ve tried to master a habit ever, you will know the pitfalls and difficulties that facing a new habit brings. But yet most of what you do every single day is, indeed, a habit.

Habits are said to have emerged because it’s our brain’s way of saving time. If you find a way of doing something and it works, you create a habit and it takes less brainpower to think about.

A habit is a hack to unlocking the next level of productivity. You just need to convince yourself that the time and effort is worth the risk.

You hate losing but that could help your habit formation – decision making

You know that you avoid loses. It’s probably the thing that sways a decision for you:

It’s not “what’s in this for me?” more likely it’s “what will I lose?”

And because of that, if you want to get serious about embedding habits, perhaps the best way to overcome that is to get clear on what you have to gain and reframe anything that you have to lose.

The first sensible task of the exercise is to write down what you think are the pros and cons of this new habit. For ease, we’ll use the example of writing, let’s say for this example I want to start writing for 3 hours a day.

Pros:

  1. A creative outlet to allow me to explore my thoughts

  2. Use as a mediative process to forget about everything else

  3. Learn a new skill that will help me in any career

Cons:

  1. Takes 3 hours out my day which could be spent doing other things

  2. I need to buy a new computer that will cost $2000

  3. I will need to reference books in my writing which will cost more money

This decision is now a trade-off. Do I want to spend 3 hours of my day, $2000 on a computer and money on buying books for the upside of having a creative outlet and to learn a new skill? This leads to many questions:

  1. Will I use this new skill?

  2. If I buy the computer will I use it or end up knocking the habit on its head after a month?

  3. What if I buy some books and never read them?

  4. Is a creative outlet what I need or should I be doing something else with my time?

  5. Will this new skill help me in a career or is that wishful thinking?

At the moment the decision feels like a risk, 3 hours of my time, $2000+ expensive for an unsure outcome. But what we can do in this case is to reduce the risk which allows us to make the decision of committing to the habit.

Can you reduce the risk and form the habit?

You start with the riskiest things. Usually money and time. Do you really need to spend $2000+ or will your crappy computer do? Do you need to buy a fancy $2000 machine or will a $300 machine do the job? Do you need to write for 3 hours a day? How about committing to 30 minutes and seeing how you get on?

Often you will overwhelm yourself with expectations to make the decision feel riskier than it is. This extends into starting your own business. Starting your own thing might well be something you’ve wanted to do for a while now but you can’t seem to find the commitment.

Instead, take the pressure off. Instead of feeling like you need to risk your job and your livelihood you can take a step back and think about the easiest first step. Now that could be committing to doing an hour of research night for a week. That could be brainstorming 7 business ideas a day for 2 weeks.

Instead of creating a decision in which there is high risk and therefore playing to your predictability of being loss averse (or in other words saying you will but never being able to stomach the risk) create a situation where there is low risk initially.

Final thoughts: Decision Thinking

  1. We are creatures of habit, circa 40% of your time is in activities that are referred to as a habit.

  2. We are also creatures that true to minimise risk where possible, some of the time we minimise risk is to avoid the decision altogether.

  3. Instead of avoiding a decision, take steps to reduce the risk within the decision.

  4. Take the first step by reframing your risks as smaller, more manageable risks and concentrating on the upsides.

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