What is "loss aversion"? How do I overcome it when making life decisions?

Have you ever been in a situation where you felt that you made the wrong decision?

David has a membership to the gym and enjoys going. Lately, he has stopped going for various reasons, but canceling his unused membership feels like admitting that he lost the money.

This is an example of loss aversion, an aspect of life where people tend to stick with what they have or know unless there is a good reason to switch.

Because loss aversion can influence how you make decisions, overcoming its effects can help you make more informed choices.

When we think about change, we focus more on what we might lose rather than on what we might get.

Our brains turn on "safety guards", so our inner voice learns to be extra loud and irritating when we lose things to make sure we try really hard to keep what we have.

In David's case, admitting defeat and quitting his workout routine makes him think he has lost money, even though he hasn't been able to attend the gym for valid reasons.

Reference Dependence

• We compare outcomes to what we expected or already have.

• Everyday example: A $300 bonus feels disappointing if you expected $500.

Status Quo Bias

• We prefer to keep things the way they are.

• Everyday example: You stay in a job or relationship because change feels risky.

Endowment Effect

• We value things more because they belong to us.

• Everyday example: You think your old car is worth more than it really is because it's yours.

Diminishing Sensitivity

• Each added gain or loss has less emotional impact than the previous one.

• Everyday example: The first disappointment hurts more than the tenth disappointment.

Prospect theory analyzes how people make decisions involving risk and uncertainty. Often, people believe that:

• Losses feel stronger than gains.

• Avoiding pain is better than gaining benefits.

• Decisions are emotional, not purely logical.

Loss aversion is a key principle of this theory. This video briefly explains how they're connected:

Here are six evidence-based techniques to reduce the influence of loss aversion:

1. Reframe the decision.

Instead of asking, "What could I lose?", shift attention to both sides of the equation. Ask yourself:

• "What could I gain?"

• "What is the cost of doing nothing?"

• "Which choice is likely to leave me better off in five years?"

2. Think in probabilities, not possibilities, and make decisions in percentages.

Considering expected outcomes can reduce emotional reactions.

For example, instead of thinking:

I might lose $1,000.

Think:

There's an 80% chance of gaining $3,000 and a 20% chance of losing $1,000.

3. Focus on your long-term goals.

Ask yourself:

• "Does this decision move me toward my goals?"

• "Am I protecting myself from a short-term loss at the expense of long-term success?"

Keep the bigger picture in mind. It makes temporary setbacks easier to tolerate.

4. View losses as the cost of learning and know that some are unavoidable.

Successful entrepreneurs, investors, and professionals often see setbacks as tuition rather than failure.

A helpful mindset is:

My goal isn't to avoid every loss — it's to make decisions that have positive expected value over time.

After a loss, ask:

• "What did I learn?"

• "How will this improve my next decision?"

This reframes losses as investments in experience.

5. Use a decision journal.

Before making an important decision, write:

• Your reasoning

• Your expectations

• Possible outcomes

• Why you're choosing this option

Reviewing these later helps you distinguish between good decisions with bad outcomes and bad decisions with good outcomes.

6. Consider opportunity cost.

Avoid focusing only on what you might lose by acting.

Also ask:

• "What might I lose by not acting?"

• "What opportunities am I passing up?"

Sometimes inaction carries the greater cost.

Remember David, who isn't sure what to do about his gym membership? He has some options:

1. Do nothing. Since David is paying for a gym membership with his credit card, he could continue to let it automatically process the fee and not hassle with the details.

2. Cancel his membership. David could accept the loss of money and terminate his membership at the gym.

3. Get back in the saddle. David could go back to the gym and start a new workout routine that would benefit him physically and mentally.

There are many ways to stay calm when it comes to loss aversion! Here are some resources that will help you make informed decisions: