When Richard Thaler, Nobel laureate in 2017, was asked about the $1.1 million award that came along with the Prize in Economic Sciences, he cheekily said “I will try to spend it as irrationally as possible.” Thaler’s bon mots are a subtle admission of how humans behave in the real world. That’s what he was awarded the prize for in the first place.
No matter, the paper drew a good deal of attention from those like Drew Dickson, chief investment officer and managing partner at Albert Bridge Capital. In a pointed tweetstorm, he succinctly summed up their position, challenged their thesis, while noting that they perhaps have identified “other motivations for well-known biases.” But he too reaches the conclusion that loss aversion is alive and well.
Where I suspect the authors went astray was in the conflation of various cognitive failures, biases and heuristics with loss aversion. Consider for a moment a Las Vegas casino. If people were truly loss averse, the counterargument might suggest that casinos shouldn't exist. But they not only survive, but thrive. This is due to other powerful cognitive errors: 1) people tend not to understand how the odds are stacked against them and in the house’s favor; 2) others understand the probabilities, but irrationally believe they are an above-average gambler; 3) others simply gamble for its entertainment value and are willing to accept the inevitable losses.
The mere fact that gain-seeking behavior exists hardly eliminates loss aversion as a phenomena.
What is most fascinating to me about the premise that Gal and co-author Derek Rucker of Northwestern University's Kellogg School of Management have pushed forward is around the meta-concept that challenging the status quo is an uphill battle. They are on to something here, though surely they recognize that Daniel Kahneman and Amos Tversky’s famous theory was itself not accepted for a long time. Kahneman and Tversky’s ground-breaking 1979 paper was an assault on the status quo at the time, and it took decades before their thesis was assimilated into psychology and economics.
But this does bring up an intriguing concept: As any counterintuitive idea slowly becomes mainstream, it too is eventually challenged as the status quo. Perhaps this is what physicist Max Planck meant what he stated that “science advances one funeral at a time.”
For many good reasons, loss aversion has become accepted wisdom on how people make decisions under conditions of uncertainty. I suspect it will be a long time before that explanation is overthrown.
This column was provided by Bloomberg News.