What Nobel Prize Winner Daniel Kahneman can teach us about why taking the hardest decisions of them all is so hard.
In his book Thinking Fast and Slow Nobel Prize winning economist and thinker Daniel Kahneman introduces us to many fascinating insights into the human decision-making process. Loss Aversion is one of these. He begins by explaining how a simple experiment provides evidence of how strongly this cognitive bias affects how we take decisions:
Loss Aversion Theory
[Extracted from Thinking Fast and Slow by Daniel Kahneman p.283-4.
Many of the options we face in life are “mixed”: there is a risk of loss and an opportunity for gain, and we must decide whether to accept the gamble or reject it. Investors who evaluate a start-up, lawyers who wonder whether to file a lawsuit, wartime generals who consider an offensive, and politicians who must decide whether to run for office, all face the possibilities of victory or defeat.
As an example of this decision-making in practice, examine your reaction to the next question:
You are offered a gamble on the toss of a coin.
If the coin shows tails, you lose $100.
If the coin shows heads, you win $150.
Is this gamble attractive? Would you accept it?
To make this choice you must balance the psychological benefit of getting $150 against the psychological cost of losing $100. How do you feel about it? Although the expected value of the gamble is obviously positive, because you stand to gain more than you can lose, you probably dislike it – most people do.
For most people the fear of losing $100 is more intense than the hope of gaining $150. We concluded from many such observations that “losses loom larger than gains” and that people are loss averse.
You can measure your aversion to losses by asking yourself a question: What is the smallest gain that I need to balance an equal chance to lose $100? For many people, the answer is about $200, twice as much as the loss. The “loss aversion ratio” has been estimated in several experiments and is usually in the range of 1.5 to 2.5.
Loss Aversion in Operational Decision-Making
This is an astonishing ratio when you think about it, particularly when we translate the implications of a simple financial transaction or bet into the realm of operational decision-making.
Let’s take the example of a rescue scenario in which a helicopter crew find themselves faced with a situation in which they must winch four survivors from a stormy sea. They estimate they only have the performance and endurance to winch up two of the four survivors if they are to carry out the task safely, and within the limitations of the aircraft and established fuel minima. Despite this, they calculate that it might be possible that the extra two survivors could be brought on board at the expense of ‘stretching’ their established power, weight, and endurance limits, and they mull over this possibility.
They are faced with a decision. Let’s superimpose the scenario of this decision-making process onto the example of Kahneman’s experiment above. There will of course be many other factors to this decision, but we won’t introduce them here so as not to complicate the equation.
The stakes in Kahneman’s example above are no longer represented in financial terms ($100). Instead, the risk associated with the $100 stake is represented by the risk of damage to aircraft, equipment, crew, property, or third parties every time we fly. At worst, this stake could even represent the cost of life. You might think this stake to be a high one – and you would be correct – but (unlike Kahneman’s example which offers 50/50 odds) in risk terms it is offset by the fact that we generally consider the likelihood of a poor outcome to be low.
The ‘gain’ for this stake, or our return on this investment is represented by our professional status, fulfilment, pride in our role, sense of self-worth, and (especially in the case of risk-to-life missions) a feeling of making a contribution to society, or saving the life or limb of another human being. Taken together these are no small gains for the human psyche.
On the other hand, failure to carry out the rescue successfully would represent the ‘loss’ that is described by this scenario within the context of loss aversion theory.
If the gains are high, Kahneman’s evidence of our loss aversion tells us that at a ratio of around 2:1 we are going to be even more reluctant to surrender them.
It is approximately twice as hard for us to take a decision to abort a mission, turn-around, or land, as it is for us to keep going with the task or the plan for which we had cognitively primed ourselves.
The Cognitive Bias Responsible for Press-on-itis
This theory explains a lot about the power of that well-known ailment suffered by the unsuspecting aviator; “Press-on-itis”. It is approximately twice as hard for us to take a decision to abort a mission, turn-around, or land, as it is for us to keep going with the task or the plan for which we had cognitively primed ourselves. This will continue to be the case even if we have recognised a changing risk profile during the course of a flight.
The effect of this phenomenon is compounded by a further finding of Kahneman’s work on Loss Aversion. He also provides evidence for the case that humans are guided by the immediate emotional impact of gains and losses, rather than the long-term prospects of whatever the outcome may bring. This further increases the odds of us failing to take that difficult decision. The emotional impact of a perceived ‘failure’ to achieve a task (the loss) is immediate and weighs heavily on your mind, whereas the possibility of a bad outcome still seems remote, and improbable.
From this we are able to make a couple of simple observations:
Firstly, any decision that involves a perceived failure to achieve a task, a loss of face, a hit to professional credibility or, self-respect will very likely be affected by this powerful bias. Secondly, it is probably fair to say that if a decision of this nature hangs in the balance, then the chances are that the correct decision is the option that makes you feel least comfortable.