What Does Loss Aversion Have to Say About Liberalism’s Timidness Toward Conflict?

If complacency and a natural bias toward the status quo didn’t take a toll on human judgement, the Roman Empire would still be in power and IBM would forever be the biggest tech company, along with AT&T as the monopolist supplier of communication services, but obviously that is not how human minds work. Psychological misjudgements rooted in loss aversion drives us into complacency and keeps us satisfied with the status quo.

First, let’s make sure all readers are on the same page, so here is definition of loss aversion via Wikipedia:

Loss aversion is the tendency to prefer avoiding losses to acquiring equivalent gains. The principle is prominent in the domain of economics. What distinguishes loss aversion from risk aversion is that the utility of a monetary payoff depends on what was previously experienced or was expected to happen. Some studies have suggested that losses are twice as powerful, psychologically, as gains. Loss aversion was first identified by Amos Tversky and Daniel Kahneman.

Loss Aversion, Wikipedia

In plain-yogurt English, I will define it as not considering the probability of acquiring similar gains because you are too focused on similar losses.

This is doubly applicable to liberal democracy because it is in bed with globalization, which just happens to be an extremely profitable endeavor for a large part of the western world. If the economic status quo is feeding the monstrous corporate appetites for profit then we can automatically assume that loss aversion will weigh heavily on key decision-makers, especially those operating inside a wounded liberal democracy that is currently bleeding from gaping wounds inflicted by populism, inflation and a general mistrust of democratic institutions. Let’s just say we are playing a very weak hand, our opponents are smart enough to realize this fact, but our strategy continues to remain the same.

Thankfully, there’s a gentle breeze that’s starting to blow in more extreme ends of the political spectrum—sadly, the ends that currently control the levers of democratic power after years of hollowing out the middle. This breeze, if it picks up, will force the hand of liberal democracy, albeit very late in the game, to make powerful & painful (from a quarterly profits standpoint) decisions that will serve the general interests of all. With the level of extreme inequality that currently exists in the western world, it will be interesting if such decisions are even possible. Alas, let’s not dwell on the negatives.

But how did we get here anyway? We can blame the mother of all human ailments: cancerous complacency—i.e. a greedy bias toward the status quo, which conveniently happens to be the beating heart of loss aversion.

In other words, liberal democracy as we know it has been been lulled to sleep—or maybe we should call it extreme fatigue? All in the process of its gluttonous appetite for profit, whether it comes via cheaper labor to make textiles, shoes and cutting boards or cheap programmers based in India, Pakistan or Eastern Europe, it is the profit that drives the quarterly numbers, it is the profit that drives important decisions to under-invest in human and physical capital within our own borders, and it is also this relentless thirst for profit that silently fuels the exponential growth of the cancerous tumor of complacency. As with all hidden away tumors, the diagnosis and acceptance of the diagnosis took more time than expected. Unfortunately, doctors are saying the removal of this tumor will be painful.

I apologize in advance for going east to look for an example of what is occurring in the west. The man who westerners consider the “Architect of Modern China,” the great Deng Xiaoping, is quoted in Richard Evans’s excellent biography discussing how China must use capitalism for its own benefit:

… ‘to restrict to a certain degree the savage exploitation of the past [but] to stimulate capitalistic production, which is at present beneficial to the development of the national economy’.

P. 87, “Deng Xiaoping and the Making of Modern China”, Richard Evans (currently in the middle of this read)

Evans goes on to explain Deng Xiaoping’s comment in the very next sentence: “It was characteristic both that he used no euphemism for ‘capitalistic production’ and he used the words ‘at present’ before ‘beneficial’, making it clear that it was not in the communists’ scheme to tolerate capitalism for ever.”

It’s very telling (and not surprising) how the Chinese perceive their relationship to capitalism. They will utilize it until it is socially and economically useful, but the second it begins to encroach on the communist power structure, they will squash it without any feeling of loss aversion. If you’re one to follow any type of news coming out of China over the past couple years—or know about their Zero-Covid policy—you’ll understand what I mean. In other words, the loss the central government feels is one of authoritarian power, not capitalism-fueled economic power.

If we were to make a similar statement on behalf of liberal democracy, it would go something like this: ‘…to restrict to a certain degree the savage exploitation of the past [but] to stimulate neoliberalism, which is at present beneficial to the development to the capitalism-fueled globalized economy.’

It’s possible the passing of the landmark “Chips & Science Act” and not to mention the recent “Inflation Reduction Act” are hints of a change of liberalism’s direction and tactic, but time will tell whether profit-seeking lobbyists will get the best of all the billions being poured into both laws.

Bureaucracy aside, when authoritarian danger approaches, obviously there are many options on the table—economic sanctions are one, for example, but at some point the west will arrive at a decisive fork in the road and it will need to make a critical decision that will seal its long-term fate.

This decision will involve whether to go into a boots-on-the-ground type of conflict to combat against what appears to be a war of attrition on the eastern front of liberal democracy. The heavy weight of loss aversion—whether rooted in stock market crashes, collapsing trade routes, inflationary spikes, political unrest, anti-war protests, to name a few—will make seemingly uncomfortable decisions difficult for leaders in the west. Modern leaders must be wary of the powers of loss aversion and try to make prudent, seemingly uncomfortable, decisions that will score sizable long-term gains for liberal democracy, rather than allowing their natural inclination to be hobbled by complacency with the status quo.