The Amygdala: Where Loss Aversion Linger
Quick Review: What Is Loss Aversion (Via wikipedia)
In prospect theory, loss aversion refers to people’s tendency to strongly prefer avoiding losses to acquiring gains. Some studies suggest that losses are twice as powerful, psychologically, as gains. Loss aversion was first convincingly demonstrated by Amos Tversky and Daniel Kahneman.
This leads to risk aversion when people evaluate a possible gain; since people prefer avoiding losses to making gains. This explains the curvilinear shape of the prospect theory utility graph in the positive domain. Conversely people strongly prefer risks that might possibly mitigate a loss (called risk seeking behavior).
Loss aversion may also explain sunk cost effects.
Loss aversion implies that one who loses $100 will lose more satisfaction than another person will gain satisfaction from a $100 windfall. In marketing, the use of trial periods and rebates try to take advantage of the buyer’s tendency to value the good more after he incorporates it in the status quo.
Locating Loss Aversion: Abstract (Via PNAS)
Losses are a possibility in many risky decisions, and organisms have evolved mechanismsto evaluate and avoid them. Laboratory and field evidence suggests that people often avoid riskswith losses evenwhen they might earn a substantially larger gain, a behavioral preference termed “loss aversion.” The cautionary brake on behavior known to rely on the amygdala is a plausible candidate mechanism for loss aversion, yet evidence for this idea has so far not been found. We studied two rare individuals with focal bilateral amygdala lesions using aseries of experimental economics tasks. To measure individual sensitivity to financial losses we asked participants to play a variety of monetary gambles with possible gains and losses. Although both participants retained a normal ability to respond to changes in the gambles’ expected value and risk, they showed a dramatic reduction in loss aversion compared to matched controls. The findings suggest that the amygdala plays a key role in generating loss aversion by inhibiting actions with potentially deleterious outcomes.
Findings (via PNAS)
Our account of the findings proposes that the amygdala computes a signal of prospective loss that is integrated with other information to guide behavioral choice.More specifically, lesions to the amygdala would result in a reduced input to downstream regions that compute value through integrating across multiple inputs. In the case of evaluation of mixed gambles, this could result in a reduced aversive signal elicited by the prospect of potential loss together with normal appetitive signals triggered by the prospect of potential gain. As a consequence (in particular when the EV of the gamble is close to zero), the appetitive response to the gain component of the gamble may outweigh the aversive component in the lesion patients. This scenario would explain themild loss-seeking behavior (i.e., λ < 1) of S.M. as well as the high acceptance rate of gambles with small magnitude but negative EV observed in A.P. (Bottom Left corner of B in Fig. 3), a type of behavior not seen in the controls.
Click Here To Read: Where Loss Aversion Lingers: Amygdala damage eliminates monetary loss aversion