Anyone who has ever stood to lose anything (all of us) knows that emotions play a big part in how we react to potential loss. Sweaty palms and upper lips, fidgety fingers and bouncing knees, frantic, racing thoughts — all are signs of emotional tumult when facing the risk of loss — and all seem involuntary. But a recent study indicates that we can influence the degree of emotional reaction, and our level of loss aversion. The solution, in short: think like a trader.
Seasoned traders are careful not to lose perspective when facing potential loss. They view loss as part of the game, but not the end of the game, and they rationally accept that taking a risk entails the possibility of losing. Researchers wanted to investigate whether cognitive regulation strategies (like those embodied by traders) could be used to affect loss aversion and the physiological correlates of facing loss.
Subjects were given $30 and offered a choice to either gamble the money, and potentially lose it, or keep it. They could theoretically win up to $572, or lose the $30 and be left with nothing. The outcomes of their choices were revealed immediately after the choice was made (e.g. “you won”). Subjects completed two full sets of choices (140 choices per set). During the first set, subjects were told that the choice was isolated from any larger context (“as if it was the only one to consider”); during the second set, subjects were told that the choice was part of a greater context (“as if creating a portfolio”) — in other words, the introduction of “greater context” (taking a different perspective) functioned as a cognitive regulation strategy.
The researchers conducted this study twice: in the first, they observed behavior; in the second, they observed behavior and administered a skin conductance test (a measure of sympathetic nervous system activity) to measure level of emotional arousal.
The results: using the cognitive regulation strategy had the strong effect of decreasing loss aversion. Most importantly, only individuals successful at decreasing their loss aversion by taking a different perspective had a corresponding reduction in physiological arousal response to potential loss. So, cognitive regulation led to less loss aversion, which led to less sweat on the upper lip.
The question remains: is loss aversion a satisfactory response to anticipating discomfort and pain (emotional or physical), or is it more of a judgment error caused by a tendency to exaggerate the outcome of loss? The results of this study support both positions. On one hand, losses feel worse than gains feel good because the physiological response is linked to feedback about loss or gain (in other words, it’s easier to feel really bad about a potential loss than it is to feel really good about a potential gain if loss is still a possibility – we tend to dwell on the loss side because we know it hurts).
On the other hand, the study also shows that fear of loss can be regulated, which means that it’s a changeable quantity. Even though loss aversion serves a purpose, there’s a high likelihood we begin with too much of it for our own good.
So, it seems even if we are sensitive to the possibility of loss, we can make ourselves less so by changing our thinking. By taking a different, larger perspective, loss loses a few of its teeth and becomes a less scary beast.
(One concluding note: since this study addressed monetary loss, I’d leave the analysis in that category and of those things with similar dynamics (e.g. asking someone out on a date, interviewing for a job, etc.), and not extend it to Loss (with a capital “L”) of life, or life of loves ones; it seems to me that gets into a different area altogether and can’t be as practically addressed.)
Sokol-Hessner, P., Hsu, M., Curley, N., Delgado, M., Camerer, C., & Phelps, E. (2009). Thinking like a trader selectively reduces individuals’ loss aversion Proceedings of the National Academy of Sciences DOI: 10.1073/pnas.0806761106