In a podcast about his new book “Skin in the Game,” Nassim Taleb said he didn’t believe loss aversion exists. He had a Medium post where he explained his view further – excerpt below.
Note: The flaw in psychology papers is to believe that the subject doesn’t take any other tail risks anywhere outside the experiment and will never take tail risks again. The idea of “loss aversion” have not been thought through properly –it is not measurable the way it has been measured (if at all mesasurable). Say you ask a subject how much he would pay to insure a 1% probability of losing $100. You are trying to figure out how much he is “overpaying” for “risk aversion” or something even more stupid, “loss aversion”. But you cannot possibly ignore all the other present and future financial risks he will be taking. You need to figure out other risks in the real world: if he has a car outside that can be scratched, if he has a financial portfolio that can lose money, if he has a bakery that may risk a fine, if he has a child in college who may cost unexpectedly more, if he can be laid off. All these risks add up and the attitude of the subject reflects them all. Ruin is indivisible and invariant to the source of randomness that may cause it.
I believe that risk aversion does not exist: what we observe is, simply a residual of ergodicity.
As psychology buffs know, loss aversion was a concept introduced by Nobel Prize winning duo of Amos Tversky and Daniel Kahneman. So, this is a fascinating assertion.
And, after mulling this over the last few days and considering my own experiences, I agree with Taleb’s point about the futility of attempting to measure loss aversion in a laboratory. I think we all treat risk as a portfolio. So, attempting to isolate and draw conclusions from one aspect of the portfolio isn’t going to generate meaningful results.
It is a compelling idea. I think I need to read more Taleb.