Why We Overvalue What We No Longer Have: The Psychology of Loss

We over value the things we have, overreact when we can’t have something anymore, and resist change. In other words, we hate loss. But because loss is frequent and inevitable, our hatred of it guarantees that we suffer.

Let’s take a look at the psychological mechanisms that make us act this way.

The Endowment Effect

Suppose that Nathan and Mae are two students at the same school. It is randomly determined that Mae will be given a school mug, which she gets to keep. Mae then writes down the least she would have to be paid to be willing to sell the mug. Nathan, likewise, writes down the most he’d be willing to pay to buy the mug. What do you predict will happen?

You’d think, if the human brain were rational, that the mere act of having just received a mug would not immediately make us value the mug much more highly. Yet, when this experiment is conducted, the student given the mug (Mae) needs to be paid a great deal more to part with it, on average, than the student not given the mug (Nathan) would be willing to spend to buy one.

This Endowment Effect, as it’s called, means that we tend to value things more highly just by virtue of owning them.

You know that tiny dog statue you acquired somewhere (perhaps you don’t even remember where)? You may not be willing to part with it, even though you would never buy it now if given the opportunity. We hate to lose what we have (after all, it’s YOURS).

The Familiarity Effect

We tend to like things more as we grow more familiar with them. This applies to foods (many of which we enjoy more the more we eat them), rooms (we start to become more comfortable with spaces that we are used to) and people (overtime we stop classifying people as “strangers” even if our interactions have always been superficial). It even applies to objects (my office chair is comfortably familiar to me). Perhaps this psychological tendency is rooted in the evolutionary need to be safe: things we are familiar with are less likely to contain hidden danger. If you’ve been around that guy many times, and he’s never tried to kill you, he’s probably not going to try today.

This Familiarity Effect, where we prefer that which is familiar to us, makes loss more difficult. We may have a hard time giving up people in our lives, even when we don’t like them much or they don’t treat us well. So we continue spending time with friends we don’t like rather than seeking out unknown strangers (who would of course eventually become friends). And if we lose what we’re already familiar with, we have to go through the unpleasant process of getting acquainted with unfamiliar things (how uncomfortable!).

Association

When two things are paired repeatedly, the emotional reaction we have to one starts to bleed into the emotional reaction for the other. This occurs through a process known as Classical Conditioning.

It means, however, that we begin to value the irrelevant traits of things that are valuable, even when those traits have nothing to do with the value itself. For instance, we have very positive feelings towards our romantic partner who has certain personality quirks (or physical traits), so we develop very positive feelings towards those quirks, coming to believe we would have a hard time being with someone who doesn’t have them. Or it could mean that we start to prefer products made by a particular brand, because we have a positive association with the brand itself. In fact, many brands bombard us with ads attempting to get us to link positive things (e.g. attractiveness, wealth, a desirable lifestyle, calming scenes of nature) with their logo. They apply Classical Conditioning to us like Pavlov applied it to his dogs. Just look at beer and bottled water ads, which associate a particular brand with a particular lifestyle.

This means that we’ll overvalue what we have, in part, because we associate value with irrelevant features that don’t produce value themselves. We are loath to throw away our shirt with the trendy brand, because that logo evokes value. Who cares that the shirt looks bad on us. And don’t forget how sad it is that you’ll never again find a romantic partner with quirky traits X, Y and Z, that you now find so adorable and endearing after your last partner had them.

Expectations

If you were to win $100 at a casino, and then five minutes later make a terrible bet and lose that money, chances are you wouldn’t feel nearly as bad as if one day you were to have $100 stolen out of your pocket. Why? Because, in the first case you didn’t have the time to adjust to the world where you had an extra $100. So your brain is likely to experience the first scenario as roughly breaking even (though likely with some, though not too much, regret). You got a lucky break, and then got unlucky which took you back to where you started. So on net you neither gained or lost. On the other hand, in the second scenario, it feels like a pure loss (you’re $100 in the hole compared to what you’re used to).

To put it another way: Taking $100 out of your bank account and putting it in your pocket doesn’t make your brain feel like you’ve gained $100, since you’ve already gotten used to a world where that money is yours. Whereas winning $100 randomly at a casino feels like a bonus, that’s on top of what we already have, so losing that money (before you’ve gotten used to having it) pretty much brings you back to where you started (psychologically speaking).

This is about expectations. If you expect to lose $100 you might feel good about only losing $50, whereas if you expect to gain $100 you might feel bad about only gaining $50. Our emotional reactions to change are filtered through our expectations. This idea of a set point, against which gains and losses are measured, is elegantly encoded in Prospect Theory, which is a powerful description of how humans think about risk and uncertainty.

The thing is, we have all sorts of expectations that we’ve already accepted about the future, most of which assume things will be as good, or better than the current state. We may assume, for instance, that next year we’ll have the option to stay in the job we have now. That means that if we get fired, we may perceive it as a huge loss, even if we really don’t like our job and have a good chance of finding one we like better. Losing the job still violates our expectations about what we have available. If, on the other hand, we had assumed that we very likely would be fired (for instance, due to an announcement that there would be major cutbacks), the blow of losing the job would be easier to come to terms with.

The expectations we have about our future help cement our emotional reaction to loss. If opportunities disappear that we assumed we would have (like staying in the apartment we’re currently in, staying with the partner we currently have, or staying in the city where we currently live) we perceive it as a big loss because it violates what we already took for granted, even if it turns out that some of these things don’t give us much value.

Conclusion

We overvalue what we already own. We become comfortable with what we’re used to having, and have discomfort around unfamiliar things. We start to value the merely incidental features of the things we like. Our expectations about the future tend to make the assumption that our current opportunities will continue, or perhaps even improve.

These psychological mechanisms set us up to feel that loss is much worse than it really is. We are scared to lose what we have, overact to losses when they do occur, and dwell on losses that have occurred in the past. Yet, in most cases, we recover from loss faster than we would predict. Months later, our day-to-day existence is usually less altered by the loss than we would assume. In the short-term, we overreact more to loss than we acknowledge. In the long-term, we’re less harmed by loss than we predict.