Winning, Losing and the Way they Hit

Daniel Kahneman and Amos Tversky published a study on loss aversion in 1979. They called it “Prospect Theory.” Their paper showed people feel losses about two to three times more intensely than equivalent gains.

The the bad feeling associated with losing $X is two or three times as big as winning $X.

Understanding this has a big impact on decision-making.

I frequently say: “I’ve never regretted not taking a case. But I’ve definitely regretted taking some.”

Embedded in that is the conflict between emotional and objective financial outcome: I’d much rather risk turning away cases on which I’d make money than accept one where I didn’t earn a fee (and lost money on overhead and costs).

What I “logically” should be doing is weighing the money made and lost equally when it comes to case selection. (The twist is that, unlike placing a wager on a soccer match, there’s a lot of work that goes into handling a personal injury case before there’s a win or a loss.) But at this point in the game I’m not sure I can replace emotion with logic.

The same analysis applies to clients and the decision whether to settle their cases. But understanding Prospect Theory doesn’t change the fact that losing at arbitration or trial creates emotion that runs a lot farther down the Y axis than winning runs up it.