The Great Simplification with Nate Hagens - Loss Aversion | Frankly #25

Episode Date: March 10, 2023

On this Frankly, Nate reflects on his experiences in the financial industry with the cognitive bias Loss Aversion and the ways it may manifest to the coming material throughput declines during The Great Simplification. Why do losses feel so much stronger to us than gains - even when we have an overabundance of wealth? Can being aware of this evolved psychological trait diffuse its intensity? How does this affect our ability to perceive and plan for the reality of less available energy and resources in the future? To Watch on Youtube: https://youtu.be/cKqu3gH1Mz4 For Show Notes and More: https://www.thegreatsimplification.com/frankly-original/25-loss-aversion  

Greetings. I've got some pretty intense, frankly, is coming up, one on probability, certainty, and identity. That's going to be next week because it's a little more involved than I thought. I just got back from a snowshoe with the dogs and here's some thoughts going through my mind about a topic called loss aversion, which is the cognitive bias where our human brains care more intensely about losses than we do about equivalent gains. I was exposed to this at a young age in my mid-20s when I was managing money and doing trades for billionaires at Solomon Brothers and at Lehman Brothers. Here's a couple stories. I mean, I have hundreds of stories. One guy was 80 years old and he owned a lot of apartment buildings in New York City.

He had $850 million worth of U.S. treasuries and all he did every day was have wait for the coupon payments to hit his bank account. And I remember one day there was a problem with the QSIP number and his payment hadn't arrived of like $50,000 in interest on one of his treasuries. He called me and he was so ballistic, so polite all the time, except he missed one interest payment. And so his brain, this was like a super normal stimuli that that little bit of interest disrupted his entire day because he wanted it. I was like, what the hell? And a little bit later, I had a guy that owned a lot of stock that he had gotten. in a, you know, in the company he used to work for. It was valued at like $2.

And we found out one day that some buyout happened for $24 a share. So he just had an immediate windfall of like $80 million. And he was pretty happy about it. But then a few weeks later, it turns out there was some due diligence. And the buyout price was going to be reduced by 15%. So he was only getting $68 million. instead of 80 and he was just absolutely freaked out, mad, livid, sad, outrageous going to fight this and what's going on. And I was like, what is going on here? Many years later,

I discovered this is an example of the psychological cognitive bias called loss aversion, where if we start with, say, $10,000 and we get an immediate windfall gain of 1,000,000, thousand or 10%. And we measure the psychic utility of that. And then simultaneously, we lose a thousand dollars. So we're right back to where we started at 10,000. But the negative psychic feeling from losing research is shown in our species and in other species is twice as strong emotionally. Now, there are good evolutionary reasons for this, because when we had enough food to survive, as humans or pre-humans, a little bit extra food wouldn't have made the difference. But if we lost food, it might have made the difference between surviving or dying.

So we are intensely focused on loss aversion. And as followers of this podcast can surmise, I think loss aversion is going to be one of the main cognitive biases that hit our society writ large in this financial, biophysical rubber band snapping moment in the coming decade where our musical chair claims of digits and electrons and paper in our wallets on what our biophysical situation can afford to service and maintain is going to cause a loss in people's physical circumstances of what they think they own and the perception of the future. I'm quite worried about this because loss aversion is very strong.

I've witnessed it on Wall Street. I mean, think of the Great Depression when there was the stock market crash in 1929. There were people jumping out of windows because they had been. lost 80% of their wealth in one day on what otherwise was a beautiful autumn day in New York because the shock of such an immediate loss causes people to lose perspective of all else. And I think that's coming our way financially for sure in many areas of the world. But it's not just finance. And it's not just the end of growth per se.

because what ends up happening is this story itself, the great simplification about how we've papered over our financial claims with debt and we're going to have to tighten our belt and live with 30% less. That story itself causes a threat to people's identity because they've made decisions in their life based on the cultural story of we're following progress. We're going to be richer in the future. And so the end of growth has a physical connotation, but actually the idea of the end of growth has an immediate identity loss aversion to people that hear it. Also with social media, you know, when we shout down someone else on a Twitter or YouTube thread, people attach their identities to their tribe, their network.

their ideologies and belief. And when someone hears evidence to the contrary, this is a loss aversion because in the same way that calories in our ancestral past led to potential survivability, identity in social media is a supernormal stimuli that makes us feel we are losing calories because we're losing status, reputation, etc. So in our brain, The currency is the same thing, which is why people are so vitriolic on our current social media. And it's why artificial intelligence is a huge risk coming ahead because we're not going to know what to believe and we're going to feel a loss in our own identities.

Loss aversion also shapes our cultural stories and our paths like the Green New Deal and other such fixes are popular because as a culture we're not willing to give up anything that we've become accustomed to possessing, which means we limit ourselves to the subset of responses that actually can't physically work. So I've often said that PV and wind turbines and other things can power a decent civilization, just not this one. But loss aversion keeps us from looking at pathways that might really work. You know, on a different lens, as we head to a lower material throughput existence in the

future, do we really want to be the things that we own, much less the things that we could theoretically own? Some of the world's happiest people, and I've been to Ecuador and Zambia and many places, little material possessions but a smile. So personally, I think knowing about loss aversion, perhaps shifting one's definition of self-worth away from material net worth could be a great adaptive strategy, not to mention being true. As per usual, there are wider boundary lenses on this topic of loss aversion. What about deep time loss aversion? Our species owns a world in a very real sense and we have since the beginning. But we're losing it and have been blinded

to this slow motion loss by highly stimulating illusions of immediate gain. How much do each of us really feel about the loss of X number of species per day and the deteriorating deterioration of Earth's ecosystems, we only have an aversion to losing what we know we have and care about. So perhaps we need to reset our loss aversion heuristic to minimize the loss of the only things we could ever really have in the long term, those things that are priceless in a lonely universe. So I think about loss all the time. I understand. I understand understand the human impulse to react more strongly to losses than to gains. And if you really understand this, you can make changes in your own life ahead of the

great simplification to maybe measure yourself worth by natural, social, built, and human capital instead of financial capital. So you won't have this feeling of loss. And loss aversion to an end of growth isn't always the appropriate response. Ask any cancer survivor. So here are just some quick thoughts on the concept of loss aversion. I think it's going to be an important one in the years and decades to come. I'll see you next week and I will make a social contract.

There will be a podcast or frankly on. probability, identity, and certainty. Talk to you soon.