Gambling small losses but avoiding small gains
We are more willing to gamble small losses but are risk adverse when it comes to gains. What does that mean for climate change and resource scarcity?
I came across this in one of my notebooks from about 5 years ago, I think it came from Malcolm Gladwells book “What the dog saw”.
“A group of people were told to imagine they had $300, they were given a choice between (a) receiving another $100 or (b) tossing a coin, where if the won they got $200 and if they lost they got nothing. Most of us prefer (a) to (b).”
“In the second experiment, they told people they had $500 and then asked them if they would rather (c) give up $100 or (d) toss a coin and pay $200 if they lost and nothing if they won. Most people prefer (d) to (c).”
“We’re more willing to gamble when it comes to losses, but are risk adverse when it comes to our gains. That’s why we like small daily gains in the stock market, even if that requires that we risk losing everything in a crash.”
I think that there are many parallels to this in our approach to the environmental challenges we face. More and more of the population of developing countries are starting to see that we are gambling with our kids future (it used to be that we would say gambling with our grandkids future but things have sped up a bit), but we are still accepting small gains in our daily lives for the sake of a big loss after we have gone.
The quality of the houses that we occupy now are better than those that we grew up in as children, when I was five we didn’t have central heating in our house in England but we do now. It’s a very small gain in the overall scheme of things but combined with everyone taking the very small gain it’s going to create a very big loss in the future.
But the challenge is this – we are giving people the $500, then asking them if they would (c) give up $100 (carbon tax, renewable energy etc) or (d) toss a coin and get nothing if they win or make someone in the future pay $200 if they lose (they don’t pay anything if they lose). Everyone is going to pick (d), everyone does pick (d).
So how do we change this? If we are more willing to gamble losses but are risk adverse when it comes to gains how do we change the options? How do we make it so the small daily losses are better than small daily gains, because we all know that a future big win is better than a future big loss for our children.