loss aversion

Here is a nice link between my human factors blog and public policy. The idea of loss aversion says that people prefer (generally with a large subconscious component) to make worse decisions if it means avoiding an overt loss. For example, many people will hold onto a bad stock because they refuse to sell it at a loss. They will wait for it to at least come back to their original purchase price (which most eventually do just because of inflation) and then sell it. Gamblers do the same thing - they keep playing until the are even (or broke). Homeowners have been doing it for the past year, refusing to sell their houses for anything less than they paid for it.

These are poor choices because they take into account "sunk costs" which should be irrelevant if the decision was just economic. But any major decision is not just economic, it is also psychological. Which is where effects like loss aversion comes into play.

So what does this have to do with public policy? I can't say it any better than this. (warning, there is no permalink yet. So if you read this after Oct 5, you will need to find the Sept 30 comic).