Which cognitive phenomenon explains why individuals may underperform in risk-based scenarios?

Loss aversion is the cognitive phenomenon that explains why individuals may underperform in risk-based scenarios. It refers to the tendency for people to prefer avoiding losses rather than acquiring equivalent gains. In situations where individuals are faced with potential losses, the anxiety and fear of losing something they already have often outweigh the prospect of winning something new. This heightened sensitivity to loss can lead to overly cautious behavior, impacting decision-making and causing individuals to underperform when faced with risks.

In risk-based situations, individuals might shy away from potentially beneficial choices because the fear of loss leads them to make decisions that are more conservative. For example, a person might choose to avoid investing in a stock that has high potential returns due to the fear of losing their initial investment, even if the expected payoff could outweigh the risks involved. As a result, this tendency to prioritize loss avoidance can hinder optimal decision-making and lead to subpar performance in scenarios requiring risk assessment.

Understanding loss aversion provides insight into the psychological barriers people face in risky situations, illustrating how emotions and cognitive biases can heavily influence their choices.