The Power of Loss

In the 2009 NFC championship, the Minnesota Vikings faced off against the New Orleans Saints for a berth into the Superbowl and a fairy tale ending to the career of Minnesota’s then newly acquired veteran quarterback, Brett Favre. The Saints were the clear favorites in the matchup – they were younger, they were faster, they were stronger. But, to the surprise of everyone watching, as the clock ticked down the remaining seconds of the game, Favre and his Vikings were tied with the Saints and on the forty-yard line, on the edge of field goal territory. One field goal, that was all the Vikings needed, and with Ryan Longwell, one of the league’s best kickers, waiting on the sideline, it looked like Minnesota fans were finally going to have something to celebrate. Then, Favre did something unusual. Instead of calling a conservative play, essentially something to use up a down so that Longwell could come on the field and propel the Vikings into history, he threw an interceptio and lost the game.

In order to understand the thought process behind this now infamous stain on the illustrious career of Brett Favre, we must try to put ourselves in Favre’s shoes. On third down, on the forty-yard line, we have two choices: run the ball, or throw the ball. Now, lets analyze the potential outcomes of these two choices from an economic perspective. The first course of action, running the ball, would likely move the ball an insignificant amount closer to the end zone, only slightly increasing Longwell’s chances of kicking a field goal. Running also, however, has a very low potential for devastating losses, as fumbling the ball is a rare occurrence. The second course of action, passing the ball, could benefit the team greatly, in that it would push the line of scrimmage significantly closer to the end zone and greatly increase Longwell’s probability of kicking a field goal, but it also has relatively high potential for significant loss, in the form of an interception, which would yield the ball, and as it turned out, the game, to the Saints. Presented with this scenario, low risk for low gains vs. high risk for high gains, most people would choose the former, as I will discuss later. Favre, however, did the opposite, and was forced to live with what we all fear: extreme loss.

It has long been accepted that, as stated in the famous paper “Prospect Theory: An analysis of decision under risk” by psychologists, Kahneman and Tversky, human beings are averse to losses. Don’t believe me? Then take, for example, this survey question posed by Daniel Kahneman in his new book Thinking Fast and Slow:

The U.S. is preparing for the outbreak of an unusual Asian disease, which is expected to kill 600 people. Two alternative programs to combat the disease have been proposed. If program A is adopted, 200 people will be saved. If program B is adopted, there is a one-third probability that 600 people will be saved and a two-thirds probability that no people will be saved. Which of the two programs would you favor?

The first program is the seemingly obvious correct choice, as it guarantees a gain. Now here’s the second scenario:

The U.S. is preparing for the outbreak of an unusual Asian disease, which is expected to kill 600 people. Two alternative programs to combat the disease have been proposed. If program C is adopted, 400 people will die. If program D is adopted, there is a one-third probability that nobody will die and a two-thirds probability that 600 people will die. Which of the two programs would you favor?

Although the same exact scenario, we suddenly have to stop and think. Framed in relation to loss, not gain, an easy decision has suddenly become a complex dilemma that gets jammed somewhere in the frontal cortex.

So, humans are averse to loss, more so then we are attracted to gains. Think about it, even though there was a one-third probability in the program D that everyone would live, was that enough to counterbalance the chance that everyone could die? Even in situations where gains clearly outweigh potential losses, humans, Kahneman and Tversky argue in their paper, will more than likely act irrationally, reacting not to a reasonable evaluation of costs and benefits, as economics would like us to, but to the ominous threat of a loss, always lurking around the corner. But if we know we act irrationally in the face of potential loss, can we not use that knowledge as a tool to fight our own instincts, and act in a rational manner?

In his new book, Kahneman analyzes the idea that self-knowledge should enable humans to correct their irrational actions and behave just as the economists would like. Kahneman claims that self-knowledge is, well, worthless. I’ll offer myself as an example. I’ve taken economics, and I understand the basics of cost-benefit analysis. Yet, when constructing my second semester schedule this past week, did I sign up for a writing seminar, as would be the smart thing to do? Nope. I’m scared of the time I’ll lose to writing essay after essay in that class, and I don’t care that the benefits of getting it out of the way early may outweigh these costs. Maybe, you think differently than me. Maybe you are able to analyze costs and benefits and make a rational choice, completely independent of loss aversion. Brett Favre did it anyway, and look where it got him.