Loss Aversion – gains vs losses

When a coin is flipped:

If the coin turns up tails, you lose $100

If the coin turns up heads, you win $150

Would you take the risk?

Most people would fear losing $100 more than hope to gain $150.  This is called loss aversion, and the loss aversion ratio is usually between 1.5 and 2.5, so if you could lose $150 or gain $250 then people would be likely to take the risk.

This also works subconsciously, in scenarios like golfing.  When a player is near the hole that person might be faced with two situations: putt to avoid a bogey, or putt to achieve a birdie.  Not making par is seen as a loss, whereas missing a birdie is just not getting a gain.  Now, this shouldn’t affect how well golfers putt with each of these goals in mind, but it does. After analyzing more than 2.5 million putts, Devin Pope and Maurice Schweitzer found that players were more successful when putting for par than for a birdie, with a difference of 3.6% success rate. If Tiger Woods had putted as well for birdies as he did for par, he would have earned almost $1 million more per season.

http://www.alexwhittaker.org/?p=26
http://www.youtube.com/watch?v=nOX1Hn-bw1k 

"Incorporating Loss Aversion into Your Sales Pitch." Incorporating Loss Aversion into Your Sales Pitch. The Spruance Group, 2012. Web. 17 Dec. 2012.

Kahneman, Daniel. Thinking, Fast and Slow. New York: Farrar, Straus and Giroux, 2011. Print. Pages 303-304.
Wray, John. "Brain Fail 1 - "Loss Aversion" (Preview)." YouTube. YouTube, 03 Nov. 2010. Web. 15 Dec. 2012.
Alex. "Disappearing Bacon: An Application of Prospect Theory (2)." – Whittaker's Chambers. Carrington, 16 June 2009. Web. 13 Dec. 2012.