Loss Aversion, Negativity Bias, and more.

Here’s what’s in store for today:

• Understanding Asymmetric Aversion

• Negativity Bias

• Taking advantage of Loss Aversion (a poker story)

Read time: 4 minutes

“A recession is imminent.”

The words no one wants to hear.

They force the markets to tumble in mere seconds.

They cause people to cash out their hard-earned investments at brutal losses.

They literally change the way our world behaves.

Even mentioning an economic recession is enough to sound the alarm and obliterate the Nasdaq.

But why?

Fear and negativity get people to take action.

21st-century media loves to dwell on the negatives.

Take this example:

If your friend told you they knew of a new cryptocurrency token that was guaranteed to net you 100x returns next year, you’d be skeptical and probably wouldn’t invest.

But what if they told you to avoid that same crypto token because they heard it was doomed to fail? You’d be skeptical and probably wouldn’t invest.

What you’d be experiencing is called Asymmetric Aversion (also known as Loss Aversion).

This is the tendency for losses to affect us more than gains.

It doesn’t just apply to the financial sector, though. We see loss aversion in psychology, game theory, economics, and even in animals.

So why do we experience loss aversion?

Some say it’s rooted in our genetics.

According to Darwin, animals with more urgency for danger survive longer.

In more modern psychology, we typically avoid things that might harm us, at the cost of missing out on something with an equal or greater gain.

Take a coin toss, for example.

Let’s say we have a bet where if a coin toss lands on heads, I give you $1, and if it lands on tails, you owe me $1. Pretty harmless, right?

Now, let’s increase the stakes.

Instead of $1, you owe me $25,000 if it lands on tails (and I owe you the same if it’s heads.)

Sure, you have a 50/50 shot of winning $25,000—but the fear of losing that much might urge you to avoid the game altogether.

If you only look for the downside, that’s all you’ll see.

The best tree skiers in the world will all tell you the same thing:

Don’t look at the trees.

If you look at a tree, you’ll hit it.

Dodging trees is about looking for the path forward.

Negativity Bias (also known as “pessimism”) is the tendency to only look at the downside of things. You weigh the negatives as more extreme, often completely ignoring the benefits.

The same goes for the opposite—when you constantly make an effort to find the bright side, you’ll usually find it.

We’ve been so engrained as a society by hostile media and harmful technology that we’re accustomed to pessimism. Whether actively or subconsciously, we find comfort in (and sometimes even enjoy) the negativity around the globe.

But it can literally pay to be optimistic…

A poker tournament story.

Loss aversion has helped me win an online poker tournament.

In a Multi-Table Tournament (MTT), players compete to be the last one standing. Over hours (or even days), players try to make it to the “bubble,” which is the point where if you’re still remaining, you’re guaranteed to win something.

I played in a 300-person online MTT and won by understanding human behavior and psychology. (I also had decent cards, which helped…)

Players get scared when only a few people are left before the bubble. They want to guarantee they make money and will play extra passively to survive.

This is one of the best times to be aggressive.

People are risk averse. They fear losing more than they crave winning.

I used this concept to make big, risky plays when I knew people were scared of losing all their chips.

I 5x’ed the amount of chips I had while other players were too busy being fearful, which ultimately helped me win the entire tournament (and a $500 Amazon gift card.)

This famous quote from Warren Buffet doesn’t just apply to the stock market.

Whether it’s creating content online, digital marketing, or poker, asymmetric aversion is everywhere.

The best way to fight loss aversion is to simply recognize that people make irrational decisions in times of fear. Even when the benefits may outweigh the downsides, the idea of losing is enough to change our minds.

Next time you’re scared to make a decision, think about the consequences.

Are there actually fewer losses than gains?

How will your emotional state be if you win? Will it overpower the feelings if you lose?

Even just the awareness that loss aversion exists might be enough to empower you to act.

Understand this, and you’ll realize how much you might be missing in life by being fearful of losing.

Quote of the week

Thanks for reading!

If you have any questions, hit me up on 𝕏 at @sam_starkman, or feel free to reply to this email!

— Sam