A Three-Question Quiz To Test Your Rationality | Big Think
Geege Schuman stashed this in Brain
Today I learned about loss aversion.
Question 3: Genevieve offers you a bet. “Flip this quarter,” she says. “If it’s heads, I’ll give you $200. If it’s tails, you pay me $100.”
Should you take the bet?
The bet question does not have a right or wrong answer, per se, but it highlights what Kahneman calls an irrational “loss aversion” everyone seems to suffer from, at least to some extent. Technically speaking, any bet where the payoff is greater than the loss, given an equal chance at either outcome, is a good one. And the prospect of earning $200 is a much better payoff that easily outweighs the $100 you’d have to pay Genevieve if you lose. Assuming the loss of $100 is tolerable — you know where your next meal is coming from, and you don’t need the money to pay the rent — you should, as a rational agent, accept the bet. The real-world problem with loss aversion isn’t that you’ll pass up great bets like these — Genevieve would have to be crazy to offer it, after all. The loss aversion ends up costing you dearly if you spend too much time protecting your precious assets when you should be just as assiduous about prospecting for new ones. I once spent about three hours, over several weeks, making calls to a merchant who had charged me shipping for an item I purchased online with a free shipping coupon. I finally got my $8 back. But if someone would have offered me a job calling up multiple customer service agents, waiting on hold, getting the runaround, etc., for a promise of $8 in compensation, there’s no way I’d accept it.