Loss aversion is one of the key biases that influence human decision making in the face of uncertainty. Combined with the possibility effect, it can lead people to give highly unlikely events more weight than their probability justifies.
Studies based on Prospect Theory suggest that people are more sensitive to losses than gains. This sensitivity is demonstrated by ERPs that reveal different responses to gambles with equal expected value.
- Understand the Bias
Loss aversion is a fundamental concept from the field of behavioural economics and describes the psychological weight placed on losses compared to gains. Amos Tversky and Daniel Kahneman’s research1 suggests that on average, a loss may be valued up to 2.5 times more than a gain.
Another bias that is common to sports betting is the control illusion, which is the illogical belief that you have more control over a random event than you really do. A bettor with this bias might think that their dice-throwing technique is better than their opponent’s or that they know both teams well enough to predict which team will win.
This irrational belief can lead to more reckless bets and decisions, especially when the results are unfavorable. One example is chasing losses, where bettors try to recoup their previous loses by placing bigger bets with lower odds, which can ultimately lead to more losing streaks. The recency bias is also a common cognitive bias, which is when people weigh recent data or events more heavily than they do older ones.
- Reframe the Issue
In order to combat loss aversion, you need to change the way that you view the problem. One of the best ways to do this is by reframing the problem itself. This can be a difficult task, but it’s essential if you want to overcome loss aversion.
For example, you might think that insulating your home is an expensive and time-consuming process, but if you frame it as a savings in energy costs, then you will be more motivated to take action. The same principle applies to a business: by reframing a bad result as an opportunity, you can encourage people to get back to work and make things right.
The concept of reframing is an important element in behavioral science, and was first introduced by Daniel Kahneman and Amos Tversky in the 1970s. Their prospect theory explains that we value potential losses more heavily than potential gains. This translates to our tendency to avoid risks and seek out safe options, even when they’re unlikely to succeed.
- Take a Long-Term Approach
Losses can be a part of betting and learning how to overcome them is key. Taking a long-term approach to losses and not giving into them can help you learn from your mistakes, develop confidence in your abilities and ultimately improve your gambling habits.
Behavioral science has established a phenomenon known as loss aversion1. In a famous graph, Kahneman and Tversky showed how people’s psychological values of gains and losses are represented by their preference for the amount to be gained when compared with the same quantity of the same loss. This is often captured with the phrase “losses loom larger than gains”.
This behavioural bias makes many of us less likely to take risks when it comes to investing money or buying new products, such as home insulation. It can also contribute to problems such as compulsive gambling, where individuals lose control over their betting and may even risk their relationships, lives and livelihoods.
- Remain Positive
The key to long-term success in betting is staying positive and not getting caught up on your recent performance. You will have losses and it is important to remember that this is part of the process. It is also important to keep in mind that variance will even itself out over large sample sizes and you should always evaluate the probability of a loss before making any bets.
This will help you to avoid the “certainty effect” that leads people to over-weight certain outcomes and under-weight those that are only probable. This type of thinking can make you averse to taking risks when they could pay off. A good way to combat this is by framing your decisions as if they were poker hands and calculating the expected value of each bet before you place it. This will help you to be more open to risk and to overcome the Loss Aversion Bias. The more you practice the better you will become at controlling your emotions and being able to think objectively about your betting.