Sam Sivarajan.Supplied
Sam Sivarajan is a keynote speaker, independent wealth management consultant and author of three books on investing and decision-making.
As the election neared in the United States, the country seemed more divided than ever. With Donald Trump reclaiming the White House, and the Republicans reasserting control over the Senate and the House, voters have, on the surface, chosen sweeping change. Despite handing Mr. Trump a clear mandate, many American voters felt that the actual platforms of the two candidates weren’t that different on many crucial issues. And neither party seems to be prepared to address some of the key concerns of voters.
The situation isn’t that different in Canada. Partisan disputes about taxes, health care and public safety continue to monopolize headlines. Meanwhile, everyday challenges – endless traffic, long waits for medical care and escalating living costs – reduce the quality of life for citizens across the political spectrum. Yet, despite widespread frustration, real policy shifts seem out of reach. Why is it that genuine change, even when supported by data and logic and a broad swath of voters, so rarely takes root? The answer lies, to some extent, in a peculiar facet of human psychology: loss aversion.
Loss aversion is a key concept in behavioural economics that shows humans feel the pain of losses twice as intensely as the pleasure of equivalent gains. This bias explains why people cling to the status quo, even when it is less than ideal. The mere possibility of loss often looms larger in our consciousness than any potential benefits of change.
In politics, this effect is glaringly obvious. Studies show that voters have a deeply ingrained preference for the status quo, driven by this fear of losing what they already have – a fear so strong that only the most compelling crises can push them toward change. When voters face the risk of losing services related to health care, economic stability or public safety, they become even more averse to risk. Even rational policy reforms struggle to win support because the emotional weight of potential losses overshadows the appeal of possible improvements. It’s what’s known as the “political endowment effect,” where voters grow emotionally tied to existing policies simply because they are familiar. In other words, better the devil you know than the one you don’t. Over time, policies that have become part of our institutional landscape become sacred relics. That is why existing policies are often fiercely defended, even when they prove to be outdated or ineffective.
This loss aversion bias doesn’t stop at politics. It carries over into how we make money decisions. Driven by the fear of loss, investors often choose less risky strategies that fall short of delivering the returns necessary to meet long-term goals. Many people keep substantial assets in cash or low-yield investments, finding comfort in not losing money rather than focusing on missed opportunities for growth. The stock market crash of 2008 and recent volatility fuelled by inflation and geopolitical uncertainty highlight this behaviour. Those who suffered financial losses during these times often remain hesitant to return to the markets, even long after recovery, opting instead for the illusory safety of inaction.
Loss aversion extends to everyday choices, too. From holding onto properties during market slumps to sticking with costly repairs on an old car, our fear of loss leads us to pour money into “safe” investments that barely keep up with inflation, prioritizing minimizing regret over making rational financial moves.
So, how can we break free from this deeply rooted tendency? It may help to reframe the narrative around change. Instead of focusing on what we might lose when we act, advocates and policy makers can emphasize what we lose by not acting. The hidden costs of sticking with the status quo should be front and centre to the electorate. Breaking a change down into small incremental steps can also prove effective, making reforms feel less risky and more manageable. But that requires a clear vision and a clearly communicated strategy, just like for personal finance decisions.
For investors, automation serves as a powerful tool to combat loss aversion. For example, setting up automatic investment contributions reduces knee-jerk reactions to market swings, sidelining the emotional aspect of financial decision-making. Another strategy is scenario analysis: mapping out different possible outcomes and assigning probabilities to each. This approach broadens our view beyond immediate fears, fostering a more balanced perspective about likely developments. Last, ensuring that we focus on long-term objectives rather than short-term market fluctuations can help counteract loss aversion.
While loss aversion can protect us from reckless decisions, it can also leave us stuck in mediocrity. From our voting choices to our financial habits, finding a balance between caution and calculated risk could lead to better government policies and better personal outcomes. As the philosopher and psychologist William James put it, “The greatest weapon against stress is our ability to choose one thought over another.” Maybe the thought we need most is recognizing – and recalibrating – our fear of loss.
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