Thursday, December 16, 2010

Losing a bird by hand is worse than losing two to the bush.

There is within psychology, markets, and decision theory a sort of odd bias with loss aversion. People hate to lose things far more than they like to win things.

If you have a choice between getting $1000 bucks and then just taking another $500 bucks or flipping a coin and getting a bonus $0 or $1000 bucks a lot of people just take the $500. However if you are given $2000 dollars and asked to either give back $500 or flip a coin and lose $0 or $1000 people opt for the bet. There's a chance you can hang on to all of your money! -- But the deals are exactly the same. You get $1500 or $1000 vs. $2000 half the time. You should like both of them the same.

Now, I love poking fun at idioms, or questioning some of the merits (some are stupid and inverted between each other and whatever the outcome the idiom is just adjusted after the fact. If you acted too quickly and lost, you should have looked before you lept, if you didn't act fast enough and lost, that's what happens to "he who hesitates"). And I wonder if loss aversion would play a roll with regard to the bird in hand is worth two in the bush. If you're odds of catching a bird in a bush is 1/2 for each particular bird. Is it also loss adverse if you have two birds and have to either just let one of them go free or play a game of chance whereby you might keep them both or neither? Is losing one bird by hand worse than maybe losing or keeping both? What if by some authority I see you with two birds. And demand that you either free one or if you'd like shoot my bird in the bush accuracy game to maybe keep both birds.

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