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Loss aversion bias is our human tendency to weigh losing something disproportionately more than gaining the same thing.
For example, people are more motivated to quit a bad habit when told that habit will result in losing 5 years of their life vs quitting the habit gaining them 5 years of life.
Our brains obsess about loss far more than potential gain.
One way this impacts our money is making us too attached to our various services and subscriptions. This bias makes it such a drama to drop cable, switch cell phone carriers, or cancel a membership because we hate letting go of things we see as already ours, even if we wouldn’t pay to gain it again.
What if I can’t find another way to watch that show I love? What if the other service isn’t as good? What if I change my mind?
All the “what ifs” that our brain comes up with feel just as important as having our very livelihood at stake. These are little things, but they feel big due to this inherent bias. It’s a disproportionate feeling compared to reality.
If you’ve locked in a low rate by staying with a particular service, like your gym membership is only $10/month after your first year, I get it. You’d lose that advantage by leaving. But remember if you don’t go to the gym regularly, even $10/month is no advantage. In fact, it might even be a disadvantage if it simply cements in the guilt that you’re not working out enough.
Most of our subscriptions and memberships, however, can be started and stopped without any disadvantages. You could easily go six months without one of your TV streaming services, your premium music service, and your Instacart subscription. Only by letting them go will you be able to assess each one’s value for your life without the fog of loss aversion bias. Because this bias clouds out the usual fact that you haven’t actually “lost” anything – you can always sign back up again.
When you call out loss aversion bias for what it is, it becomes a lot easier to shed the fat in your budget.
Another way we can benefit from this awareness is to reframe choices knowing our loss aversion bias is a strong pull.
For example, instead of noting that we could earn more money by taking that job with the other company, we could note how much we’re losing each month or year by staying at our current one.
Framing financial choices in terms of loss can be a strong driver to do something we’re avoiding, so by knowing how this bias works, we can hijack it to our greater advantage.
Do you have expensive cost clutter leaking your bank account because you’re feeling unable to let go? We all do.
Try taking a fresh look at your expenses with this new awareness around your own loss aversion bias, and start seeing how much money you could avoid losing by letting more go.
This [loss] aversion causes us to overvalue what we consider ours, avoid statistically-prosperous risks, and make irrational economic decisions. However, when properly understood, loss aversion can be wielded to the benefit of both astute organizations and informed consumers.
JonRobert Tartaglione in Why Most Prefer Not Losing to Winning: Loss Aversion and the Endowment Effect
I hope you enjoyed this edition of Under 2, an email series designed to share quick bites of wisdom to empower your financial journey (while keeping it short). Be sure to sign-up below to get these messages in your inbox.
All for now,
Lindsey