July 22, 2013

Loss aversion and stock markets - II

This is an example of how the human brain attaches more importance to losses and not to the gains.
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A friend of mine, we’ll call him Joe so I can feel free to ridicule him publicly, complained to me the other day about a kit he bought called the “Robot Builder’s Bonanza”—it’s a beginning robotics kit. He bought it from some off brand electronics site for around $20. So he thought.

The kit arrived, but after checking his bank statements Joe noticed the charge had gone through for $31.02.
I asked him what he did about it. He e-mailed the company about the problem, and got a bullshit boilerplate response back. He did a few backflips, I guess by looking at the domain’s whois information to find a number, and eventually got on the line with someone at the company who, he reported, was rude and told him to piss off, in not so many words.

Joe is nothing if not tenacious. He called his credit card company to initiate a chargeback for the transaction. Since it wasn’t cut and dry—he had received the thing he bought, he was just charged the wrong price for it—he had to download a form, fill it out and fax in a signed copy.

After about three and a half weeks he got the difference of $11.14 refunded.

I know this because as Joe was relating this story I was totally fascinated, and I asked him for more and more detail. I knew this was a textbook case of the Loss Aversion Bias, and I wanted the full scoop to share with you.

He spent 4 hours to get an $11 refund

In all, Joe had gone through considerable effort to find an e-mail address, all the relevant transaction data, even more hassle to find a number and call it, waited on the phone with his credit card company for almost an hour, then printed, filled out, and faxed a form. All told, he had spent four hours or so over the course of a few days getting his refund. His $11 refund.

So I proposed a business deal for Joe. I said to him, listen, I have these bitchy customer service people I don’t want to deal with. You’ll have to do a little a sniffing to find the right people to contact. You’ll need to call them, figure out some paper work they’ll need, and send it all in. Shouldn’t take more than half a day’s work, I said. I’ll give you $11 to do it.

For some reason, Joe told me to get lost.

Why? in the former he was trying to recover a USD 11 loss. In the latter, he wanted to ignore a USD 11 gain! The amount is the same but the human brain attaches more importances to losses than gains.

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