Loss aversion is a cognitive bias that describes how individuals perceive the same situation more negatively when it is framed as a loss rather than a gain. It suggests that losses are felt more acutely than gains of the same size, making people more likely to avoid losses than to seek out gains. This bias is a fundamental aspect of decision-making under risk, as demonstrated in prospect theory, which posits that losses are perceived as being much greater than equivalent gains.
An example of loss aversion in action can be seen in the investment behavior of Warren Buffett, who has emphasized the importance of protecting one's capital and avoiding losses, often advising that it is better to avoid losing money than to pursue aggressive gains.
To overcome loss aversion, individuals can practice reframing their decision-making perspectives, focusing on potential gains rather than losses, and adopting a long-term view that considers overall benefits rather than short-term losses.