Truth 14. Giving up something? Get over it!
We hate to lose things. That's just human nature. Since the time we lost our first tooth, family pet, or game of baseball, we realized that losing hurts. We don't like to give up our money or our things. Is it any wonder companies end up overpaying for acquisitions? We hate to lose. And this aversion to loss affects our decisions in specific ways.
First, the loss aversion means that we value what we have to give up more than what we might gain—even if it is the same object or something as meaningless as a porcelain mug. In one study, half the subjects were given a mug and asked to sell it to the other half of the subjects. This was not a family heirloom, but just an ordinary mug they had acquired that day. But so strong is the desire not to lose things that the people who had the mugs actually valued them more highly than those who didn't. The have-nots only thought the mugs were worth an average of $2.50 to acquire. The haves wanted to receive $7 for each mug before they would let go of them. They scientifically verified the old saying that a bird in the hand is worth two in the bush. But in this case, the actual number was higher. A bird in the hand was worth almost three in the bush!
Studies by Nobel Prize winning economist Daniel Kahneman and colleagues found that the mean ratio of selling prices to buying prices was 2.29 across 16 experimental markets. This means that sellers expected to receive more than twice what the buyers thought the mugs were worth—merely because they had them in their hands!
This loss aversion also means that how you phrase a question affects the outcome. For example, people don't like to give up insurance coverage. In a Wharton study, half the subjects were asked if they wanted to give up some of their tort coverage in their insurance policies. The other half was asked if they wanted to add the coverage. The results should have been the same because they ended up with exactly the same coverage. But 77 percent of those who were asked to give up the rights held onto them compared to 44 percent of those who were asked to acquire them. Some of them probably didn't even know what "tort" was, but they had it and they wanted to keep it. This is human nature, but you need to understand it to make better decisions.7
Decisions often involve compromises. Ask yourself what you have to give up in making this decision. Then pose the decision in a different way. Put yourself in the buyer's shoes. Imagine that you don't have the thing you're being asked to give up. What would you pay to acquire it? This will help you filter out the blinders of loss aversion and make better decisions.
In his book How to Stop Worrying and Start Living, Dale Carnegie says one strategy for ending your worries is to stop worrying about a disaster and just imagine that the worst has already happened. Accept the worst and then try to improve on the situation. He tells the extraordinary story of a businessman with a severe ulcer that was considered incurable. His weight dropped from 175 to 90 pounds. He had to have his stomach pumped in the morning and evening. And the doctors at the New York hospital still expected him to die. The man said that if he were going to die anyway, he had always wanted to travel around the world, so he was going on a cruise. The doctors warned him that he would die along the way, but with complete acceptance, he replied that he was bringing along his own casket. He had given the ship's captain orders to put him in the freezer if he died and take him home to his family plot. But he didn't need the casket. He pumped his own stomach every day at the start of the trip but soon began enjoying himself so much that he was eating everything—even the exotic dishes at their ports of call around the world. By the time he returned home, he was cured. He had accepted the worst and improved upon it.
Of course, knowing how averse we are to losing things won't make the process of giving them up any easier. So after letting go of something, get yourself some chocolate or a drink to ease the pain. Keep a stiff upper lip and let it go. Remember, it is only a stupid mug.