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Welcome back to Wayfinder, your fortnightly compass for navigating life’s toughest decisions. Today we're talking about a fundamentally human bias - loss aversion.
First, let me tell you a story.
High above the world, where the air is thin and the sky touches the earth, lies the ultimate test of endurance, will, and decision-making: Mount Everest.
The year was 1996, and the mountain was bustling with climbers, all vying to etch their names in the annals of history alongside the small number of those who have conquered Everest. Among them was a team led by a seasoned guide, Rob Hall.
The rule for summiting Everest is clear – turn back by 2 PM, no matter where you are, to avoid the deadly afternoon storms.
On that fateful day, as the clock inched towards the cutoff time, Hall's team was near the summit but not quite there. Here, the sunk cost fallacy reared its head. Months of training, thousands of dollars spent, and immeasurable effort loomed in the minds of the climbers. Turning back now would mean all that investment was for nought. Or so it seemed.
In the grips of loss aversion, the reluctance to accept a loss on their sunk costs, the team pushed on, breaching the 2 PM rule. The summit was reached, but as they say, the summit is only the halfway point.
Disaster struck on the descent. A storm, fierce and unforgiving, enveloped the mountain. The team, exhausted, disoriented, and now battling the merciless weather, struggled to make their way down. In the whiteout, decisions became matters of life and death.
Rob Hall, unable to descend, radioed a heartbreaking farewell to his pregnant wife. In the end, five members of the expedition, including Hall, perished. Their decision to push beyond the turnaround time – driven by the desire not to lose their invested effort and resources – led to a tragic outcome.
This story is a chilling reminder of how the fear of loss can cloud judgment, even among the most experienced.
Loss aversion is a term from behavioural economics, referring to our tendency to prefer avoiding losses rather than acquiring equivalent gains.
It runs deep in our brains.
The pain of losing is psychologically about twice as powerful as the pleasure of gaining. This can lead to a range of poor decision-making scenarios:
This experiment underscores our natural inclination toward loss aversion: once we possess something, we irrationally overvalue it, fearing the loss more than appreciating the potential gain of something new.
Here are some questions to think about:
Recognising when you're in the grips of loss aversion is crucial for rational analysis. It involves stepping back to assess situations objectively and being willing to accept short-term losses for long-term benefits.
Stay decisive.
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