Bad decision making

Loss aversion is driving you to make sub-optimal decisions, stopping you from reaching full potential in financial and even emotional aspects of your life. Here’s an example from Nobel Laureate Daniel Kahneman on how loss aversion clouds our judgment:

There is an asymmetry between gains and losses, and it really is very dramatic and very easy to see. In my classes, I say: ‘’I’m going to toss a coin, and if it’s tails, you lose $10. How much would you have to gain on winning in order for this gamble to be acceptable to you?’’

People want more than $20 before it is acceptable. And now I’ve been doing the same thing with executives or very rich people, asking about tossing a coin and losing $10,000 if it’s tails. And they want $20,000 before they’ll take the gamble.

So the function for gains and losses is sort of kinked. People really discriminate sharply between gaining and losing and they don’t like losing.

In fact, loss aversion can have horrendous consequences for your financial health. Because of it, people (including professional money managers) are more likely to sell stocks that have increased in value rather than those that have decreased in value. Unfortunately, this is proven to lead to a lower performing portfolio and in the end less savings for retirement. You can see this sort of clouded judgment in companies as well that start off as hot startups but then lose their mojo and shy away from risk later in life due to loss aversion. What kind of company would Netflix be if it hadn’t made bold bets and navigated serious failures throughout the course of its life as a pretty big company?

Diminished learning capacity

Failure is not always bad. You might lose a highly competitive deal that also ends up being wildly unprofitable for whoever won it. You could be running an A/B test of a marketing or product concept in which one idea winning out over the other is a good thing for the business (even if you were advocating for the idea that lost in the market tests). There are many examples of losing being good, so long as something is learned from the experience. Unfortunately, most managers don’t actually know how to learn from losing in spite of running post-mortems and painful meetings to discuss and document their failures. As Harvard Business School professor Amy Edmonson points out, managers need to not only embrace failure as a learning opportunity, but also make certain that they separate the notions of failure and fault. An investigation of a failure or loss cannot be approached as an exercise in blame if anyone truly plans to learn from it.

Although an infinite number of things can go wrong in organizations, mistakes fall into three broad categories: preventable, complexity-related, and intelligent.

When I ask executives to consider this spectrum and then to estimate how many of the failures in their organizations are truly blameworthy, their answers are usually in single digits — perhaps 2% to 5%. But when I ask how many are treated as blameworthy, they say (after a pause or a laugh) 70% to 90%. The unfortunate consequence is that many failures go unreported and their lessons are lost.

A number of the categories of failure in Edmonson’s spectrum present vast learning opportunities for an organization that can help it thrive in its market. But if we simply fear losing or turn a failure into just a blame game, those opportunities are curtailed or missed altogether.

Missed opportunity for greatness

According to new research from a pair of economists from Stanford and the University of Michigan, failed entrepreneurs are far more likely to be successful in their second go-around, provided they try again. The same lesson in perseverance and success shows up in athletics, with one of the greatest competitors ever known in the history of professional basketball:

It’s unwise to hate losing, so here’s what to do instead

Don’t get me wrong, the thrill of victory is fantastic in whatever venue you choose. A big win can be rocket fuel for you and your team, rewarding your hard work and urging you on to even greater heights. But loving winning doesn’t mean that you should also hate losing. Instead, do the following:

1. Think deeply about how loss aversion could be forcing you into making bad decisions. Be self-aware and don’t stop making intelligent bets.
2. Avoid the blame game and instead work with your team to ascertain where in the failure spectrum your loss actually occurred and learn from it. Build a culture that takes the negative emotion out of the analysis.
3. Celebrate perseverance and know that many of the “winners” you see around you have overcome prior failures that you may not even know about.