Cognitive Biases: Loss Aversion

This is the final cognitive bias we will look at, and it is one of the most common with some of the widest impacts – loss aversion is present in almost everyone, and can influence anything from day-to-day decisions to major life choices.

Another cognitive bias frequent in humans that the ‘rational economic man’ model does not consider is loss aversion. For a person to be ‘loss averse’[1] means they avoid making decisions that involve removing or losing something, even if it leads to an irrational outcome in the long run. Often, it is observed that losing something makes you twice as miserable as gaining that same thing would make you happy. We can see this in a variety of scenarios – for example, if you were offered to flip a coin where heads would win you an X amount of pounds, while tails would cause you to lose £100, how large would X have to be to make you participate? Although the expected answer would be £100, as you would win or lose something equal in value, when this experiment is carried out, it is found that for the majority of people, this answer is around £200. This seemingly suggests that the chance of winning £200 offsets losing £100 by just enough for them to take part. This cognitive bias of loss aversion can cause inertia or inaction when making crucial decisions simply out of fear of losing out. This occurs even when the rewards exceed this initial loss, making people more likely to stick with their current holdings over a potentially larger profit. Loss aversion can also be observed from other perspectives. If you were given one apple, you would be happy with receiving it. However, if you were given two, but one was taken away, you are left in the same position, but now the misery of losing that additional apple has exceeded the joy of getting that first apple.

One practical application of loss aversion is reducing single-use plastic, more specifically, plastic carrier bags. It is highly unlikely that you will bring re-usable carrier bags if you were rewarded with 5p, and so the same logic should apply if you had to pay 5p for a single-use disposable plastic bag. However, this is far from the truth, as the cognitive bias of loss aversion has shown us. Even if it is only a tiny sum of 5p, consumers want to avoid this loss, and so they will go to the additional effort of bringing a spare carrier bag with them. This system was implemented in October 2015[2], when supermarkets had to charge shoppers 5p for a plastic carrier bag to try to reduce single-use plastic consumption and become more environmentally friendly. Before this system was put in place in 2014, over 7.6 billion single-use carrier bags were given to customers by major supermarkets in England – 140 bags per person, equivalent to approximately 61000 tonnes of plastic. This is a concerning figure, as most of these bags would simply be thrown away and not disposed of safely. As plastic takes anywhere from 20 to 500 years to degrade, these bags will remain within the environment for this time, causing damage to local flora and fauna.

This clearly needed to change, and after this new scheme was introduced, the number of bags sold by major supermarkets went down by more than 95% in England. Compared to the initial statistic of 7.6 billion single-use plastic bags in 2014, the quantity has fallen drastically to 564 million for the 2019-2020 period. In addition to this tremendous improvement, the sale of these plastic bags has generated £180 million in funding since the program started, which can be reinvested and used to tackle other environmental issues and help other good causes. The system has been so successful that the UK government has decided to double the charge for a plastic bag to 10p and extend the law to all retailers. According to government predictions, this upgraded system over the next ten years can: raise an expected overall benefit for the UK economy of £331 million; reduce the number of carrier bags supplied across all bag types (not only single-use plastic carrier bags but also bags for life, paper bags, cotton tote bags and bin liners) by 21%, and decrease small and medium retailer sales of single-use carrier bags by 80%. As we have seen, this project is a highly successful and revolutionary example highlighting the cognitive bias of loss aversion and how organisations and governments can use it to achieve their goals. In this case, this reduction of single-use plastic would have reduced negative pollution externalities and benefitted the UK economy for decades to come. This law would also count as a nudge, as it is relatively cheap and easy to avoid – you only need to pay 5p (or now 10p) – and it is not removing the option of still buying the plastic bag, meaning it has not restricted the choices available to the consumer.

[1] The 2014 Behavioural Economics Guide – Alain Samson, 2014

[2] UK Government – ‘Carrier bags: why there’s a charge’ – Department for Environment, Food & Rural Affairs, May 2021


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