Could Be Worse: When You See Others Losing More, You’re More Likely to Take Risks

Imagine you’re at a chain Italian restaurant eating a plate of ravioli. How good is it?

The way you answer this question will, of course, vary based on your experience. If you’ve only ever tasted the kind in a can, the answer is probably “great!” If you’ve been to Rome, you may turn up your nose.

How good or bad things feel depends on what you’re comparing them to, a phenomenon psychologists call hedonic contrast. It’s been observed across a wide range of scenarios: our perceptions of the taste of food, the beauty of art, and the pain of illness are all responsive to the so-called reference points around them.

In a new paper, Nathan Novemsky, a professor of marketing at Yale SOM, and PhD student Guy Voichek reveal a new aspect of hedonic contrast: it’s much more pronounced for painful experiences than positive ones. A win always feels pretty good, even with the knowledge you could have won more, but how lousy a loss feels is much more variable. Losing $50 feels awful when you could have lost only $1 (a low reference point), but not so bad when you could have lost $100 (a high reference point).

This pattern, which Voichek and Novemsky dub “asymmetric hedonic contrast,” has important implications for risk-taking. In the presence of high reference points, otherwise worrisome gambles can become much more enticing. For instance, if you’re at a high-end Vegas casino, your surroundings make risks more appealing—winning feels great no matter what, and losing hurts less if you’re surrounded by high-rollers who aren’t breaking a sweat over even-bigger bets gone bad.

When we find ourselves in situations (including casinos) that make high reference points salient, “the usual things that keep us away from certain risky propositions—risk aversion, loss aversion, and a number of other behavioral and rational forces—can be overcome and make a gamble that would otherwise be unattractive suddenly quite attractive,” Novemsky says. “I can enjoy the gain, and the loss doesn’t feel so bad.”

The researchers arrived at these conclusions through several experiments. In the first, which revealed the basic pattern of asymmetric hedonic contrast, Voichek and Novemsky recruited 600 participants and divided them into six groups.

In the win groups, participants were asked to imagine winning $20 in a coin toss and rate from one to seven how good it would feel—keeping in mind that other participants could win a different amount. Some participants were told those around them could win $2 (a low reference point), others $100 (a high reference point), and the rest $20 (a control). In the loss groups, participants were asked to imaging losing $20 in a coin toss and rate from one to seven how bad it would feel, knowing other participants could lose either $2, $100, or $20.

The results revealed significant differences between the win and loss groups. Among win group participants, expected pleasure didn’t vary much—winning $20 felt a bit better with the knowledge you could have won $2 and bit less good knowing you could have won $100, but the difference was subtle. Not so in the loss group: losing $20 felt much worse with the knowledge you could have only lost $2 and significantly less bad with the knowledge you could have lost a full $100.

In another set of experiments, the researchers looked at how the asymmetric hedonic contrast effect influenced risk-taking. They’d established that the pleasure of good outcomes didn’t change much based on context, but the pain of bad outcomes did. By that logic, people should be much more willing to accept a risk in the presence of a high reference point than a low reference point.

To test this hypothesis, they presented 400 participants with a high-stakes decision: A hospital is considering whether to treat an outbreak of a deadly disease with a new drug that will either increase or decrease the mortality rate by 10%.

Meanwhile, participants learned, a nearby hospital is considering another experimental treatment. Some participants were told the second hospital’s treatment would increase or decrease the mortality rate by 5% (a low reference point). Others learned the treatment would either increase or decrease the mortality rate by 50% (a high reference point).

Participants’ willingness to take on the risk of the new drug at the first hospital depended on what they were told about the second hospital. When comparing the mortality rate of the first hospital’s experimental drug to the low reference point at the second, only 36% of participants were willing to take the chance. But when they compared the first hospital’s experimental drug to the high reference point at the second hospital, that number shot up to 53%. In other words, this high-stakes risk felt more appealing to people with the knowledge that worse outcomes were possible.

What explains this pattern? Subsequent experiments established that people pay much more attention to reference points in negative situations than positive ones. When anticipating or recovering from a loss, you think more about it, and start looking around for information that could diminish the sting; reference points naturally become more salient. Meanwhile, “When you’re in the world of gains, you don’t pay attention to the reference points,” Novemsky says. “You literally just don’t look around.”

This research, Novemsky says, helps to explain why people enjoy risk-taking in certain situations more than others. He’s long been fascinated by gambling, which, based on people’s stated risk tolerances and risk-averse behavior in laboratory studies, you’d think they would never engage in.

Clearly, willingness to accept the financial risks of gambling goes beyond entertainment. After all, people “bring a lot more money to the casino than they’re ever willing to spend on a concert ticket,” Novemsky says. The new research provides at least a partial explanation: the context of a casino allows them to enjoy their wins while taking the sting out of their losses.

“I wanted to come up with a more cognitive explanation for why people gamble,” Novemsky says, “and I think one of the answers is the way they treat gains and losses.”