Loss Aversion and the Limits of Self-Knowledge

The Times recently hailed Nobel Prize-winning social psychologist Daniel Kahneman and his late research partner […]

David Zahl / 11.1.11

The Times recently hailed Nobel Prize-winning social psychologist Daniel Kahneman and his late research partner Amos Tversky as the “Lewis and Clark of the mind,” and they weren’t kidding around. Dr. Kahneman’s new book (posted on here, here and here) Thinking, Fast and Slow hits the nail resoundingly on the head in regard to one of the cornerstones of our project here: that self-knowledge, as precious as it is, is unfortunately not enough to change (mis-)behavior. Human stubbornness seems to be a, well, stubbornly fixed quality, that if any “improvements” are to be expected in life, a stronger potion is required. The New Yorker review takes the phenomenon known as loss aversion – losses hurt more than gains gratify – as a case in point. Perhaps most striking is Kahneman’s own confession that, despite studying this stuff for nigh on 35 years, it has yet to improve his own mental performance. Substitute “theology” for “social psychology” and one suspects you’d be in a similar place – not that God doesn’t work in people’s lives, just that knowledge of how He works and Him actually working are two different things altogether (thank God!). Enjoy:

Why are doctors so inconsistent? Kahneman and his longtime collaborator, Amos Tversky, explained these contradictory responses in terms of loss aversion, or the fact that losses hurt more than gains feel good. In fact, people hate losses so much that merely framing a choice in terms of a potential loss can shift their preferences. Like those physicians, people are suddenly willing to risk losing everything if there’s a chance they might lose nothing.

Although our dislike of losses might seem obvious—“You need to have studied economics for many years before you’d be surprised by my research; it didn’t shock my mother at all,” Kahneman says—the discovery of loss aversion proved to be an important refutation of human rationality. Unlike homo economicus, that imaginary species featured in macroeconomics textbooks, Kahneman and Tversky demonstrated that real people don’t deal with uncertainty by carefully evaluating all of the relevant information. They stink at statistics and rarely maximize utility. Instead, their choices depend on a long list of mental short cuts and intemperate emotions, which often lead them to pick the wrong options.

It’s been used to justify our fondness for the status quo—the present may stink, but we still don’t want to lose it—and the cowardice of N.F.L. coaches, who are far too afraid to go for it on fourth down. Loss aversion even excuses our social habits: studies have shown that it generally takes at least five kind comments to compensate for a single criticism. (The ratios are even worse for criminals: a person convicted of murder must perform at least twenty-five acts of “life-saving heroism” before he is forgiven.)

Nevertheless, there is a subtle optimism lurking in all of Kahneman’s work: it is the hope that self-awareness is a form of salvation, that if we know about our mental mistakes, we can avoid them. One day, we will learn to equally weigh losses and gains; science can help us escape from the cycle of human error. As Kahneman and Tversky noted in the final sentence of their classic 1974 paper, “A better understanding of these heuristics and of the biases to which they lead could improve judgments and decisions in situations of uncertainty.” Unfortunately, such hopes appear to be unfounded. Self-knowledge isn’t a cure for irrationality; even when we know why we stumble, we still find a way to fall.


This same theme applies to practically all of our thinking errors: self-knowledge is surprisingly useless. Teaching people about the hazards of multitasking doesn’t lead to less texting in the car; learning about the weakness of the will doesn’t increase the success of diets; knowing that most people are overconfident about the future doesn’t make us more realistic. The problem isn’t that we’re stupid—it’s that we’re so damn stubborn.

Kahneman, of course, knows all this. One of the most refreshing things about “Thinking, Fast and Slow” is his deep sense of modesty: he is that rare guru who doesn’t promise to change your life. In fact, Kahneman admits that his decades of groundbreaking research have failed to significantly improve his own mental performance. “My intuitive thinking is just as prone to overconfidence, extreme predictions, and the planning fallacy”—a tendency to underestimate how long it will take to complete a task—“as it was before I made a study of these issues,” he writes. As a result, his goals for his work are charmingly narrow: he merely hopes to “enrich the vocabulary that people use” when they talk about the mind.

[Kahneman’s] greatest legacy, perhaps, is also his bleakest: By categorizing our cognitive flaws, documenting not just our errors but also their embarrassing predictability, he has revealed the hollowness of a very ancient aspiration. Knowing thyself is not enough. Not even close.