Loss Aversion: It’s What’s Not There That Matters

SUMMARY

People would much rather sacrifice a reward rather than lose something they have. Even if what they have is just a perception.

Founder Hamid Ghanadan explores why we tend to believe that losing out on something is twice as action-inducing as gaining something.

B2B marketers can leverage the Loss Aversion Heuristic, and influence their audience to make decisions.

Absence makes the heart grow fonder.

The fear of missing out.

You never know what you’ve got ’til it’s gone.

As a society, we’ve come up with so many ways to say that the loss of something hurts twice as much as the joy of gaining it. This aversion to losing is a bias that’s so prominent in our lives that it actually drives a lot of our  decisions... even if we don’t realize it.

So why is this important?

Because leveraging this insight can generate ... Catalytic Results!

Our brain uses heuristics — or shortcuts — to make decisions. And one of these shortcuts is our brains’ desire to avoid loss, even if it’s at the expense of greater gain.

People would much rather sacrifice a reward than lose something they have … or even perceive that they have.

Think about the last time you were booking a hotel online. Whether or not you consciously saw that little message that said: “Only two rooms left at this rate!” or “48 people have looked at this hotel today.”

These messages most likely nudged you to act, because your brain — which did see this information — tried to protect you from losing what it perceived to be yours:  The rate you were seeing on screen.

At Linus, we design market research studies to measure both the perceived gain from implementing something — and the pain of loss from not implementing a particular product in a technical, scientific or healthcare setting.

And we’ve seen a clear trend: Respondents very often report that the loss of not implementing a solution would negatively affect them about twice as much as the gain they’d experience from implementing it.

Remember, the question is the same — measuring the effect of implementing something. But scientists, doctors and engineers usually quantify its effect very differently, when thinking about it through the lens of gain, versus loss.  

This type of knowledge can help us when we frame conversations or messaging.

Here’s an example: A group of doctors tested the idea of gain versus loss in motivating patients to improve their heart health through exercise. The physicians found that, while providing a financial incentive did motivate patients to engage in regular cardiovascular regimen, what worked best was giving the patients a reward first, but then create a risk of taking the incentive away if they failed to meet their daily goal!  

If you use a wearable device or a meditation app, you might not be aware that your “run streak”, or number of days in a row that you’ve exercised or meditated, is affecting your decision to keep going.  Very subtly, it does! And you’re better off for it.

Losing out on something is twice as action-inducing as gaining something. And as a heuristic, this Loss Aversion is a powerful behavioral tendency.

Humans are beautifully complex. And our actions are governed by certain patterns. Understand these patterns, you can inspire people to action and create Catalytic Results.

Business Examples + Studies

Similar to loss aversion, the sunk cost fallacy is when we make a commitment to something based on previous purchases. It tends to make us unwilling to walk away from something once a choice is made, even if the other decision has a more positive outcome.

Humans tend to outweigh the smaller probabilities to avoid losses. This is often why we buy insurance. That’s because the perceived loss of our possessions, even if highly unlikely, outweigh the likeliness of needing insurance. That’s why we’d rather take a small loss in payment, rather than risk losing our possessions.

A study in 2007 found that our brain’s region that processes values and rewards can be silenced more when evaluating a potential loss than they are activated when assessing a similar-sized gain.