Looking at the receipt or the gas bill worries many people. Can I still afford to go to the restaurant? Do I treat myself to the new pants? Does this room really need to be heated? If we are threatened with financial losses, we are very unsettled.
It is all too easy for us to be guided by our emotions and fears and not always act in our best interests. The so-called loss aversion plays a decisive role here.
We perceive losses more than gains
Israeli-American psychologist Daniel Kahneman has studied how loss affects our choices. Together with Amos Tversky he developed the prospect theory, which was awarded the Nobel Prize in Economics twenty years ago. The two psychologists were able to show that most people rate financial losses more negatively than they are happy about equally high gains. People even perceive losses twice as strongly as comparable gains.
Financial losses also stress most people physically. The electrical conductivity of the skin increases, and the amygdala – the brain region that influences emotional sensations – is also more activated when financial losses occur. “In such situations, emotions dominate, while long-term thinking suffers,” says neuroeconomist Philippe Tobler from the University of Zurich. Translated, this means that we tend to short-change actions when we expect financial losses.
The view of one’s own situation is clouded
The social psychologist Gerald Echterhoff from the University of Münster confirms this. “A deficiency or an impending loss often have a mental pull effect that clouds a realistic view of one’s own situation. In this state, we lose some of our ability to act,” he says.
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Economists also speak of the so-called “scarcity mindset” – i.e. a mental attitude that is fixated on what is missing. In the event of an imminent loss or rising prices, you may panic to collect your money but miss the opportunity to properly deal with the new situation.
In the case of rising prices, doing without may be unavoidable, which requires conscious prioritization. Anyone who does without decides on a certain course of action and is thus pursuing a specific goal: example “save money”. In everyday life, spending less often means doing without favorite habits or consumer goods.
Those who consciously abstain make a decision beforehand and differentiate: What am I treating myself to? What is essential? Where can I save a lot with minimal effort? Where not? These considerations help to structure the procedure.
Renunciation means suppressing impulses and postponing needs
The old refrigerator is a power guzzler? Then I’ll save up for a new one and refrain from going to a few restaurants a year and prefer to cook at home with friends. If food is important to me, then I save more on heating costs and take shorter showers.
One of the prerequisites for being able to do without in the right place is being able to suppress one’s own impulses and, if necessary, postpone needs. For example, anyone who decides to take shorter or colder showers in the morning in the face of increased hot water costs in order to be able to afford to go to the restaurant should no longer give in to the need for a few pleasant minutes in the shower in the morning.
Neuroscientist Daria Knoch from the University of Bern has researched the important role the prefrontal cortex – the frontmost part of the frontal lobe – plays when we suppress our impulses in favor of long-term goals. To do this, the scientists briefly stimulated the brains of test subjects using a non-invasive and painless method, thereby reducing the activity of the prefrontal cortex. The result: Those subjects whose prefrontal cortex was inhibited were far less able to forgo an immediate reward—a small monetary gain—in favor of a later, larger reward.
The prefrontal cortex must therefore be active in order to be able to decide in the morning to forgo the warm shower in favor of going to a restaurant. “But even if the prefrontal cortex is intact: Delaying a reward involves more effort than immediate gratification,” says the researcher.
Overcome diffuse fear of loss
But even if renunciation is exhausting – it can represent a sensible strategy to counter diffuse fears of loss. Another option is to take a different perspective on financial losses. Because our feelings are influenced by our thoughts or attitudes towards a situation. Many scientific studies can show that changing the way you think can change emotions in a measurable way.
In a study, American researchers asked a group of test subjects to see potential financial losses like professional stock traders. As part of the study, they were given money that they were supposed to put at risk during the study for a later profit. The physiological tension of the subjects was measured.
Those test subjects who were aware beforehand that “losses are part of it” lost their money during the experiment, just like the control subjects. But the change in perspective helped them control their loss aversion and the tension that came with it.
Being proactive helps us deal with losses
In order to keep a cool head in the face of losses and remain able to act, it helps to deal with the situation actively and strategically. “People cope better with losses if they shape them themselves and act proactively,” says the neuroeconomist from the University of Zurich.
For example, a systematic check of your own household for energy guzzlers can give you a feeling of control. The population of the Canton of Zurich has demonstrably succeeded in doing this over the past six months. Electricity consumption in the canton of Zurich shows that households have waived an average of 5 percent and companies at least 3 to 4 percent of electricity.
And sometimes it helps to consider whether something is gained by doing without: Are you actively contributing to lowering the CO₂ balance and thereby helping future generations? Mental time travel can also help to achieve a long-term savings goal. “People then imagine how consciously doing without to save money will affect their own situation in the future.” Those who consciously set goals and mentally anticipate possible obstacles can better control their own actions.
The fact is, if we want to learn how to deal rationally with impending financial losses, we must be aware of our scope for action and make the sacrifice palatable through clear prioritization. Fortunately, as rational beings, we are able to control our behavior. And so for us, giving up does not automatically mean losing.