

This article is an excerpt from the Shortform book guide to "Poor Charlie's Almanack" by Charles T. Munger. Shortform has the world's best summaries and analyses of books you should be reading.
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What is loss aversion bias? How do you avoid triggering the tendency?
The loss aversion bias is the tendency to prefer avoiding losses to acquiring new gains. This bias is triggered by the pain of losing something valuable in the past. You can manage the tendency by calibrating all your losses in true absolute terms, rather than relative terms.
Read on to learn more about the loss aversion bias.
What It Is
We hate having things taken away from us. Being deprived of things ignites a strong counterreaction.
We feel losses more strongly than gains. Losing $10 causes a stronger reaction than gaining $10 does. (Shortform note: read more about prospect theory in our summary of Thinking, Fast and Slow.)
If you almost get a reward and then have it jerked away, you feel as though you’ve had the reward the whole time and had it taken away, even though you never actually got it.
- For example, near-misses in gambling (like pulling two 7’s and a lemon in a slot machine) make you feel like you had the prize to begin with, then lost it.
We overweigh losses that are near to us—someone worth $10 million will regret losing $100 from his wallet, but not small a 0.5% loss in his assets that amounts to $50,000.
Why It Evolved
The loss aversion bias evolved because having resources was critical to survival. Losing resources threatened survival, and a strong reaction prevents making the same mistake again.
How It Can Be Harmful
The loss aversion bias causes us to overreact to the threat of a loss.
- Both Munger and Warren Buffett dislike open auctions, since they make you feel like you’ve almost won and stir you to keep bidding beyond the price you originally wanted to pay.
- In business, having things taken away may misguide your strategy. For instance, you might be worried about competition taking your market share, when the real prize to focus on is a new market people haven’t fought for yet.
A dog may bite the hand that feeds it but takes away food. Likewise, you might dislike someone who otherwise treats you well but occasionally takes something away from you (like an employer who takes you off a project).

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- A collection of Charlie Munger’s best advice given over 30 years
- Why you need to know what you’re good at and what you’re bad at to make decisions
- Descriptions of the 25 psychological biases that distort how you see the world