Let’s say you earn a monthly salary of $2000. You will get this salary banked into your account at the end of the month. In addition to the salary, you will get overtime salary, which amounts to a maximum of $1000.
Let’s say your management propose to instead, bank in $3000 to your account at the start of the month, and slowly chip away the bonus, until you are left with what you are entitled. What will be your feeling?
In the first case, we are working hard for what we want, in the second case, we feel like the $3000 is already ours, and chipping away gives us bad feelings. This is loss aversion, even though the amount lost, say $600 may be equal, the second case feels more bad.
Another example, say you have hired an employee, your satisfaction goes up. But, your employee suddenly resigned, you will feel bad loosing the employee more than the satisfaction of hiring the employee, because he once was “yours”. We just hate losing what was ours.
Now, I want to talk about loss aversion in regards to school performance. If you are a low performer, you be happy that you get a B. If you are a high performer, I will say that the misery you felt if you get a mere B is more than the satisfaction the low performer felt if he get a B. This is because for the high performer, high performance is the norm, the A is already the norm, the A felt like its already his, not having A is like stealing something from him that belongs to him.
Say, you are given a task to write an essay, you can potentially be paid $2500, in one case, you get the money that you deserve after writing the essay. I read it and give what you deserve. In the second case, I give you $2500 at the beginning, and take back what is not deserved. The second case feels much worse.