Earlier essay: In Defense of Cognitive Biases.
Recently I came across this very good video on the cognitive bias related to "Loss Aversion".
A famous science popularizer asks many people whether they would take a bet with an expected return of $10, and many say "No". He criticizes their bias, gently, but does not go into the value of having this bias.
Can this bias be explained? Why does this bias exist? What is the survival advantage in having this bias?
Let us ask the question in the video in another way so as to make it more obvious why the bias makes sense.
Let us assume, as is supremely reasonable and rational, that you value the life of your infant child. Let us say a genie suddenly appears and offers you the following proposition:
If you toss your infant in the air, I offer you two possible outcomes: Your infant will die, or it will have double the lifespan that it is currently fated to have.
What would any normal individual do? Of course they would choose to NOT participate in the bet at all. The loss of their child is a far bigger tragedy than the joy at having the child live twice as long.
Survival is the prime directive. For survival, avoiding situations which contain risk, pain and duress is important. If you have a house, losing that house is going to have a drastic impact on your well-being, but being gifted another house is not going to matter as much.
Coming back to the offer in the video above, an individual has a certain amount of money. They have that as an assurance that their immediate needs will be fulfilled, and that, as an example, they will be able to buy a bus ticket for back home, or have a meal. They have sufficient money for that.
When offered a scenario in which they can lose that money, their loss aversion is rational, sensible and reasonable. They have something to gain, but they were not counting on that gain, and they don't know what that gain will get them. But they do know what that loss will mean to them.
And even if offered multiple chances to play the bet, with each bet having the expected value of $10 to them, a reasonable individual could still rationally refuse to play. Why? Consider that it is possible that you can lose the first few rounds and be down $40, and have no more money to play the game. Yes, eventually you will come out a winner, but will you survive till then?
If you value your survival, and have a limited amount of resources -- and the limitation of resources is almost always a fact, and is hard-wired into our brain -- it is rational to avoid needless betting of your resources.
Most people choose safety, and wisely so, over speculation.
(And of course, the weird scenario of a stranger offering you an easy way to make money triggers the scam alert in our brain. Instead of investigating the alert and marking it as a false positive, it is a good idea to ignore the scam altogether, especially if the scam scenario is not important to you.)
