The Great Mental Models, Volume 2: Physics, Chemistry and Biology

by Shane Parrish

Loss aversion is one of the principles that govern the value of outcomes. Daniel Kahneman explains it like this: “When directly compared or weighted against each other, losses loom larger than gains.” According to Kahneman, people are willing to risk losing $100 for every $250 of potential gains.1 The loss aversion coefficient is 1:2.5.2 This asymmetry between the power of positive and negative expectations or experiences has an evolutionary history. Organisms that treat threats as more urgent than opportunities have a better chance to survive and reproduce.2 When it comes to reciprocity, we need to understand, “We are driven more strongly to avoid losses than to achieve gains.”3 This is why putting ourselves out there, engaging people who might dismiss or reject us, is so scary. Because in the one-off situation, the pain it will cause is perceived as stronger than the positive feelings of acceptance. The trick is to start looking at outcomes in the aggregate instead of focusing on each unique situation.