Put The Weight On The Gain

Recently, I was introduced to the behavioral psychology and economic work of Daniel Kahneman, Winner of the Nobel Prize in Economics, and I am now officially obsessed.

His most recent book, Thinking, Fast and Slow, eloquently describes his theories behind our decision making, noting the incredible amount of error our minds output everyday based upon the heuristics we've grown up with or that society has blessed us with.

Kahneman says we have two systems of thinking. System 1 is the gut reaction way of thinking and making decisions - what we usually describe as intuition. System 2 is the critical thinking, logical and analytical way of thinking when we make decisions. System 1 is where we establish first impressions of people and often is the reason why we jump to conclusions. System 2 is where we problem solve, reflect and analyze. If we can keep our big decisions in system 2, Kahneman thinks we’ll be better off. However, usually that’s easier said than done.

Reading an interview with him on the Daily Beast, he said something very simple that really struck me. When asked what advice he’d give to anyone who is afraid they will give up control to their system 1 way of thinking, he said, "Slow down, sleep on it, and ask your most brutal and least empathetic close friends for their advice. Friends are sometimes a big help when they share your feelings. In the context of decisions, the friends who will serve you best are those who understand your feelings but are not overly impressed by them. For example, one important source of bad decisions is loss aversion, by which we put far more weight on what we may lose than on what we may gain. Advisors are likely to give us advice in which gains and losses are treated more neutrally—they are more likely to adopt a broad and long-term view of our problem, less likely than the affected individual to be swayed by the fears and hopes of the moment.

Risk aversion and loss aversion (to me) go hand in hand and describe exactly the paralyzing fear we go through when embarking on an entrepreneurial journey. There are some of us that aren't averse to risk and some of us that literally never step out for fear of loss.

A simple shift in perspective here is all that might be needed if the thought of working for yourself causes you to double over in anxiety.

In addition, when you are in a fearful place it's good to lean on your advisors or people you trust as Kahneman suggests. Because they aren’t emotionally invested in your business, their advice and direction is usually the most clear-headed. If you can keep your head clear enough to follow through on their advice, and leave yourself some time to develop forethought, you might find that you have more gains than losses.

To be fair to all aspects of your life, it seems to me this shift is always appropriate. Learning a new skill, ending a friendship, pushing a limit, asking for the sale… put the weight on the gain. Being averse to a loss is human nature, but Kahneman is saying this is an error in our decision making as we may find that a certain decision could hurt worse if we choose to protect a loss over achieving a gain.

Simple is not always so easy.

Shift your focus from what you might lose: income, time, lifestyle, confidence - and focus on what you could gain: tripled income, free time, fabulous lifestyle, notoriety.

Put weight on the gain, not on the loss.