Loss Aversion

(A.) You have been given $1,000.00. Now select one of the following;

1. Guarenteed gain of $500.00.
2. Take a coin flip. You call it right you get $1,000.00. You call it wrong and you get nothing.

Which do you choose? (Write it down. Just keeping you honest!)

(B.) You have just been given $2,000.00. Now select one of the following;

1. Gaurenteed loss of $500.00.
2. Take a coin flip. You call right you lose nothing. You call it wrong you lose $1,000.00.

Which do you choose? (You wrote down the first one. Write down your answer for B too!)

Typical Answer (A.) Option A: Sure gain of $500.00.
Typical Answer (B.) Option B: Even chance to lose or gain.

Why is this interesting?

The outcomes are identical for option A (you end up with $1,500.00)

The outcomes are identical for option B (you end up with either $1,000.00 or $2,000.00)

Yet your selection is different...

We are more willing to take a risk to avoid a loss.

We are more conservative in order to lock in a gain.

This is said to be because we feel the pain of a loss much more strongly than the please of an equivalent gain...

... we feel the pain of an equivalent loss twice as strongly as the pleasure of an equivalent gain.