August 15, 2012

Fear of Loss

This is a follow-up to the post What Are We Afraid Of, looking more specifically at how we fear loss and how we have attempted as a society to deal with that fear.


We have more stuff today, more physical things like chairs and cars and plates and shoes and paintings and houseplants and clothes, than any society before us has ever had. Why is that?

Obviously, it's because our technology is far more advanced than it's ever been. But it's also because our society is set up to help us get stuff--and help us keep it. The keeping part is more important than you might think. As much as we like getting things, we like not losing them more. We don't like losing anything.

Loss happens for any number of reasons: whenever we have something and then someone or something takes it from us. Interestingly, the "something" that we lose can be as immaterial as a hope or desire--we feel loss when the possibility of winning the game is taken from us, or when the red wagon in the shop window is sold to someone else.

There are well-established theories that explain why and how our brain resists giving things up. One of these theories is called "loss aversion" by economists, and they have devised some interesting studies to show how much more "psychologically powerful" losses are than gains. In other words, this means that people value things they already have more than things they do not have, even if the thing is exactly the same (like money). Wikipedia explains it fairly well so I won't go into more details here.

Another relevant theory in economics is simply that people value security. Security helps reduce risk of loss, which people fear. Security also changes incentives, though. If you were going to die tomorrow it would completely change what you did today. In the same way, security can change what people do with their time and money longer term: if you know you will make more money for the rest of your life if you go to college ("invest in your human capital"), you might be more likely to do so.

Laws about property rights, backed up by state power, are very helpful for alleviating fears of loss because they provide security and stop people from taking our things. If our neighbor takes our car and will not give it back, we can go to the police and show them the title and get them to arrest our neighbor for grand theft auto. But of course, that's not what happens: what having property rights really means is that our neighbor will not even try to take our car, because he knows what could happen if he did. And that fact may help us decide to buy a car in the first place--if our neighbor can just drive it away, and all we could do was chase after him flailing our arms, why would we save up for a car at all?

Property rights are great at alleviating our fear of loss, because they help align incentives between people for everyone's benefit. If somebody has something shiny that you want, and you know that if you try to take it from him he will get mad and call the police, what can you do? You can offer him something that he wants. With no property rights, the invisible hand can't function, because it's too easy to resort to non-market action (aka stealing or taking without fair compensation). Property rights have helped get us all the stuff we have today, because they help limit our fear of loss, and instead of taking things we have to trade.

So, it's good that we have property rights. In fact, it's such a good idea that we sometimes forget it's an idea at all. We forget that both the legal infrastructure and the idea of ownership itself are social constructs, that they only exist because everyone believes in them and acts as though they exist. And people are barely even fooled--try leaving your bike unlocked in front of your house overnight. No matter how well you label it (THIS IS MINE! NOT YOURS!), it will likely be gone in the morning. In other words, there is no physical law of the universe that makes something yours and something else someone else's: ownership is something granted by the law and the power of the state, which in turn comes from the consent of the people.

Despite their benefits, we can carry the idea of property rights too far. Do you remember when you were a kid and you had a fight with your brother or sister or friend and drew a line on the ground to show whose side of the room was was whose? How about all the times your parents made you share your toys? At the time, as a 4-year-old, property rights might have seemed like a great idea to you. As adults they seem a bit... exaggerated. We can see that there are more important things.

One of those things is fairness. Property rights are often unfair. And as whiney as that sounds, capitalism does create winners and losers--even the most conservative libertarian will readily admit that. We can debate about what is "fair" and what is not. But there is no reason fair has to mean everything: we as a society have chosen to define private property and thus we as a society, even as an adamantly capitalist society, have the ability to put bounds on how much property a single person can have.

Certain bounds may not be pragmatic, obviously. But if we're thinking about the idea of property pragmatically then I have made my point, that the concept of private property is a means, not an end in itself. It can motivate us to be productive and to trade with others, but we should also be careful not to cling to the idea of ownership for its own sake. There are things it doesn't make sense for a person to own, like roads and schools and money that is sitting in a bank doing nothing while people are starving.

Loss is a powerful fear and we have set up a powerful system to deal with it. We should not be ruled by that fear and we should not forget that the system was set up for a purpose.

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