Positive Illusions and Regret
Over at the Neuroeconomics blog, they ask are we bad forecasters of loss? In the economic literature, loss aversion is described as turning down risks or gambles with large chance of loss, but with a positive expected value. For example, consider wagering $50 on a bet that returns $200 30% of the time and 70% of the time nothing. Even though the bet has an expected value of $60, which is greater than $50, most people will not play this bet. What is the basis for risk aversion?
Here is Neuroeconomics' conclusion:
Predications of emotional impact weigh heavily on decisions. In fact, people avoid risk even when faced with the prospect of large gain, predicting loss will hurt them much more than an equal gain will please them. If that is true, this phenomenon (termed loss aversion) is simply a rational product of accurate affective forecasting. Currently, research seems split on this question. Studies have indicated that loss induces more intense neural activity, indicating that our forecasting may be valid. However, behavioral economics generally proposes that we are bad forecasters, and studies show that we consistently overestimate the intensity of emotion from life tragedy.In a new study, participants effectively minimized impact of loss after a game of luck using various coping mechanisms, such as dissonance reduction, self-affirmation, motivated reasoning, and positive illusions. Researchers found that "there was no evidence that losing actually had a greater emotional impact than winning," showing we are indeed poor loss forecasters".
Why is this relevant to the purchasers of franchises, business opportunities, and other income earning schemes that turn out to be frauds that bring about financial losses?
Well, this group of individuals provides a serious counter-example to the rosy thesis that after a loss, "we can minimize the impact with various coping mechanisms". Fraud is devastating to individuals, it goes to the root of their conception of society. A fraud exposes society as being comprised of indifferent regulators, poor laws, and predatory jackals which roam free. (Not to mention inefficient lawyers.) There is simply no coping with this type of loss when it also reveals a barbaric society.
