Describe the risks and benefits of the natural human tendency to be risk or loss averse

Question

What will be an ideal response

Answer 1

Research demonstrates that most humans are more likely to pass up an opportunity to make a gain rather than risk a loss. Humans psychologically privilege the status quo. Whenever possible, humans take an incremental approach, seeking to avoid uncertainty and the difficult cognitive tasks of weighing and combining information or trading-off conflicting values, rather than opting for more dramatic change. Muddling through personal decisions, attempting to avoid any loss, is the norm rather than the exception. We've all heard the old adage "A bird in the hand is worth two in the bush." Making decisions on the basis of what we do not want to risk losing can have advantages in many circumstances. People do not want to lose control, they do not want to lose their freedom, and they do not want to lose their lives, their families, their jobs, or their possessions. And so, in real life, we take precautions. Why take unnecessary risks? The odds may not be stacked against us, but the consequences of losing at times are so great that we would prefer to forgo the possibilities of gain to not lose what we have. Can you think of an example of this in your life? We are more apt to endure the status quo, even as it slowly deteriorates, than we are to engage in change that we perceive as "radical" or "dangerous." Loss and risk aversion have the disadvantages of leading to paralysis or delay precisely when action should be taken. Having missed that opportunity to avert a crisis, we discover later that it requires a far greater upheaval to make the necessary transformations once the crisis is upon us. Worse, on occasion, the situation has deteriorated beyond the point of no return. In those situations we find ourselves wondering why we waited so long before doing something about the problem back when it might have been possible to salvage the situation. History has shown time and time again that businesses that avoid risks often are unable to compete successfully against those willing to move more boldly into new markets or into new product lines. Uncertainty, risk, and fear of loss are the tools of those who oppose change, just as optimistic bias and simulation are the tools of the proponents of change.