Lesson preview · Designing choices
Loss aversion, defaults and nudges
~8 min · Free to read
A friend offers you a bet on one flip of a fair coin. Tails, you pay them 100 dollars. Heads, they pay you a prize, and you get to name it.
Any prize over 100 dollars puts you ahead on average, so if you cared only about the average, 110 dollars would do. Would it be enough for you? Decide your own number, then tap what you think most people need.
In the classic studies, most people needed a prize of about 200 dollars, twice the possible loss. To them, losing 100 dollars hurt about twice as much as winning 100 pleased.
Key Term
Loss aversion
Loss aversion means losses loom larger than gains: losing something hurts more than gaining the same thing pleases. Two 2024 research reviews put the ratio at about 2 to 1 and about 1.3 to 1.
Evidence: robust that losses weigh more, mixed on how much more. The effect also shrinks for small sums: in one 2007 study with tiny amounts, gains mattered more.
Imagine a gym you joined online in two minutes. To cancel, you have to visit in person. Months later, you’re still paying, though you hardly go. The gym designed it that way.
Loss aversion helps explain why. Any change means giving something up, and that loss looms larger than what you gain. Add the effort of changing, and people tend to leave things as they are, even when a change would leave them better off. This is status quo bias (the status quo is the way things are now).
Trap · Warning
A famous finding with mixed evidence
In a 1990 experiment, researchers gave half the participants a coffee mug. Owners asked about twice as much to sell a mug as the others would pay to buy one. This is called the endowment effect: valuing something more once you own it. A common explanation is loss aversion: selling the mug feels like losing it.
But a 2005 study, which first trained people in buying and selling, found no gap for mugs. Other studies still find one.
Evidence: mixed.
Key Term
Choice architecture and defaults
Every choice comes with a layout. A canteen must put some food at eye level, and a form must start with each box ticked or unticked. Someone has to decide that. The design of the setting where people choose is called choice architecture.
A default is what you get if you do nothing. Defaults stick for three main reasons:
- Effort. Switching takes time and thought. Doing nothing takes none.
- A hint of advice. People read the default as what the designer recommends.
- Loss aversion. The default feels like what you already have, so leaving it feels like a loss.
Key Term
Nudges and the other tools
A nudge changes how a choice is presented, such as the layout, the wording or the default, to steer people. It doesn’t ban any option or make any option much cheaper or dearer. Richard Thaler and Cass Sunstein made the idea famous in their 2008 book Nudge. In their words: “Putting fruit at eye level counts as a nudge. Banning junk food does not.”
- A mandate is a rule that makes you do something, such as a seatbelt law.
- A ban is a rule that forbids something, such as no smoking in restaurants.
- A price incentive makes an option cheaper or dearer, such as a tax on cigarettes.
To sort them, ask: can people still pick every option, at much the same price? If so, it’s a nudge.
A ticked box left nearly ten times as many buyers with green electricity, though anyone could untick it. The bag charge worked mainly through price, the checkout change through layout alone. Judge a policy by what it does to people’s options and prices, not by whether a law is involved.
Trap · Common Misconception
A default isn't a rule
A ticked box doesn’t force anyone to buy green electricity. It’s a nudge, not a mandate, because anyone can untick it. In the trial, about 3 in 10 buyers who saw it ticked did just that.
Don’t make the opposite mistake either. Many of the 69 in 100 who kept the box didn’t actively choose green power: they simply left it as it was.
Trap · Common Misconception
Loss aversion isn't fear of all risk
Loss aversion makes people turn down bets that could win or lose, like the coin flip. But it isn’t a fear of every risk: when every option is a loss, people often gamble to escape a sure one. In a classic 1979 study with imaginary sums, people chose between a sure loss of 3,000 and an 8 in 10 chance of losing 4,000. Of every 100, 92 took the gamble, though on average it loses more: 0.8 × 4,000 = 3,200.
Check yourself · no marks
A school canteen stops selling fizzy drinks and puts bottles of water next to the till. Which part is a ban, and which part is a nudge?
Commit to one first. Guessing and being wrong beats reading the answer cold.
Practice · 1 / 6
A streaming service lets you join with one click, but cancelling takes five screens and a phone call. Many people keep paying for months for a service they hardly use. Which explanation fits best?
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