Loss

Everyone fears the ideas of losing. Students fear it. Gamblers fear it. Investors fear it. As long as we own something, we fear the chance of losing it.

The psychologists Daniel Kahneman and Amos Tversky coined the phrase loss aversion to describe how we feel the pain of loss more intensely than we feel the pleasure of gain.

What are the differences between losing a deposit of $150 and not getting a reward of $150? What are the differences between a 5-cent levy on the use of a plastic shopping bag and a 5-cent bonus for bringing your own grocery bag? Simple: we dislike the former (losses) more than we like the corresponding gains.

Have we proven this loss aversion in a scientific way? Not by a long shot, I must say, until I read a research paper on smoking cessation program in the New England Journal of Medicine this week.

Pretend for a moment (if necessary) that you're a chain-smoking guy who can't give up cigarettes, and then receive an invitation to enroll in a randomized, controlled trial for smoking cessation. The idea is simple: you'll be assigned (as randomly as tossing a coin) either to a deposit program or a reward program. In the deposit program, you deposit $150 at the beginning and will get back the money if you kick the habit of puffing, along with $650 extra. In the reward program, on the other hand, there is no deposit to make; you'll be eligible to receive $800 if you stop smoking.

Anyone with an ounce of loss aversion psychology would immediately tell you the deposit program is the least attractive. In the end, it is a simple truth: the least attractive program gives the most impetus to quit smoking. That sounds nuts. And it is! The researchers reported that 52.3 percent of those recruited in the deposit program had sustained smoking abstinence for 6 months, as compared with just 17.1 percent of those in the reward program.

The power of loss aversion is overwhelming.