Humans struggle with allocating losses

Canada seems to have a weird atmosphere of being in a recession, but without that term being used and without the definition (in terms of GDP growth or contraction) being met.

This starts to make more sense when you see that the GDP growth is largely the result of population growth and growth in the labour supply – not increased output per worker. GDP per capita was $58,304 in Q1 of 2020 and $58,111 in Q4 of 2023. Meanwhile, according to the Bank of Canada’s inflation calculator, inflation has averaged 4% per year over the span, so C$100 in 2024 buys what C$85.48 would have bought in 2020. The average Canadian is getting poorer, even with all the stimulus that was given out over the pandemic and with all the new debt which has been accumulated. I personally think governments have been pulling out all stops to keep asset prices (especially stocks and houses) high since the 2008 financial crisis, with very little consideration of what those measures are doing to the non-affluent and those in future generations.

This is worrisome both in the immediate context and as a broader signifier. Daniel Kahneman’s Thinking Fast and Slow stresses how people experience gains differently from losses, and find a loss of any size more aversive than they find a gain of that size pleasurable. He comments on the social and political implications:

If you are set to look for it, the asymmetric intensity of the motives to avoid losses and to achieve gains show up almost everywhere. It is an ever-present feature of negotiations, especially of negotiations of an existing contract, the typical situation in labor negotiations and in international discussions of trade or arms limitations. The existing terms define reference points, and a proposed change in any aspect of the agreement is inevitably viewed as a concession that one side makes to the other. Loss aversion creates an asymmetry that makes agreements difficult to reach. The concessions you make to me are my gains, but they are your losses; they cause you more pain than they give me pleasure. Inevitably, you will place a higher value on them than I do. The same is true, of course, of the very painful concessions you demand from me, which you do not appear to value sufficiently! Negotiations over a shrinking pie are especially difficult, because they require an allocation of losses. People tend to be much more easygoing when they bargain over an expanded pie. (p. 304)

Globally, this pattern is alarming too. Humanity is choosing to persist in activities which we know will cause catastrophic climate change, loss of wealth, and unprecedented damage to the natural world which sustains us. We are also massively failing to invest enough in non-fossil energy sources to retain our current standard of life. This is setting us up for brutal inter- and intra-national fights over allocating losses.

Related:

• Inequality, entitlement, and the breakdown of social cohesion

Author: Milan

In the spring of 2005, I graduated from the University of British Columbia with a degree in International Relations and a general focus in the area of environmental politics. In the fall of 2005, I began reading for an M.Phil in IR at Wadham College, Oxford. Outside school, I am very interested in photography, writing, and the outdoors. I am writing this blog to keep in touch with friends and family around the world, provide a more personal view of graduate student life in Oxford, and pass on some lessons I've learned here. View all posts by Milan