1. Why Do We Make Irrational Choices?

Imagine you have two choices:

• A: Receive $1,000 for sure.
• B: Flip a coin. If heads, receive $2,000. If tails, receive nothing.

Most people choose A. This is ‘Risk Aversion’.

But what if the situation is flipped? You owe $2,000 and must choose:

• A: Pay off $1,000 for sure. (Leaving$1,000 debt)
• B: Flip a coin. If heads, your entire debt is cleared. If tails, you still owe $2,000.

In this case, many people suddenly become risk-takers and choose B. This is the core of Loss Aversion.

2. Pain of Loss is Twice as Strong as Joy of Gain

According to research by Daniel Kahneman and Amos Tversky, the pain humans feel from a loss is about 2 to 2.5 times stronger than the joy of a gain of the same amount.

• Gain Domain: We prefer the sure thing. (Risk Aversion)
• Loss Domain: We hate confirming a loss and will take unreasonable risks to avoid it. (Risk Seeking)

3. Real-world Examples

• Stock Investing: Investors tend to sell winning stocks too early to lock in gains but hold onto losing stocks too long just to avoid ‘realizing’ the loss.
• Marketing: “Don’t miss out on this deal (Loss)” is often more powerful than “Get this special deal (Gain)”.