# A Speculation on Loss-Gain Impacts, from Leo Jia

January 8, 2012 |

Thinking about Kahneman's loss aversion theory (a loss has about two and a half times the impact of a gain of the same size), I feel that there might be a good reason for it.

A loss generates a fear, and a gain generates a joy in a person. The nature of fear in human is that it is recursive: a fear, a fear of the fear, a fear of the fear of the fear, and etc. Joy on the other hand doesn't seem to have this feature. So based on this thinking, fear has a growth effect which can be expressed in terms of the level of recursion n as (1 + 1/n)^n. We see that as n=5, (1 + 1/n)^n = 2.48832. So, if the joy from a gain is 1, the fear from a loss after 5 recursions is 2.48832, which is perhaps just what Kahneman determined through experiments.

Well, why only 5 recursions? That is exactly the question. If the above theory holds, then the theoretically correct number should be the mathematical constant e, which is (1 + 1/n)^n when n approaches to infinity, yielding 2.718281828459. The reason that 2.5 shows up through experiments might be because 1) it is just a rough approximation; 2) recursions in human brains don't really go to infinite levels, a level of 5-6 might be realistic.

Anyone cares to comment?

## Kim Zussman writes:

Is there not joy of joy?

If I make a bundle, I am happy. So is my wife, and her happiness makes me happy. And so on with children, friends, business associates, etc.

Another aspect is that you can spend profits any way you like, whereas losses you can't spend in any way.

## Leo Jia responds:

My basic understanding of psychology and neuroscience is this (hope someone could help clarify).

The fear is associated with a sub-conscious part of the brain, called amygdala, which takes precedence over the conscious brain in receiving an outside signal. Once this area determines a threat, it could first short-circuit the conscious brain and then sends commands to the body to fight, flight, or freeze. This is a process that could put a normal person under strict arrest. As to how it performs all this, I feel like to think that recursive fear processes (in computer's term) were generated so that it can be powerful enough to override most other bodily needs.

Joy doesn't have this mechanism. It is more of a full brain process involving the conscious brain. So its impact should understandably be limited and single-event, unless of course it is an overjoy.

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