Concept of the Day: Loss Aversion

Loss aversion is the tendency of people to strongly prefer the avoidance of losses than the acquisition of gains.

In other words our psychological reaction to the loss of a £10 note is greater than our response to finding a £10 note.

There are all sorts of experiments to show this; the coffee mug experiment is one of the most famous. In this experiment every other student in a lecture theatre were given university mugs. The students without the mugs were asked how much they would be willing to give to get a mug. The students with a mug were asked how much it would cost for them to give up the mug. The students being asked to give up their mugs consistently valued the mugs as higher than those without a mug already.

A variance on this is to have three groups of people – one group given something like the coffee mug above, the second group given something of similar value but completely different like a bar of chocolate, the third group given the choice. After a period the groups are asked if they would like to swap for the other item. In all cases the number of people wanting to change is less than 10%. If you are given something and then asked to swap the likelihood of you keep it is 90%, if you have a choice between these same items the likelihood of you choosing one item is roughly 50%. Without prior ownership the value of the two items is perceived to be similar, with prior ownership the value’s item goes up significantly.

There are all sorts of situations where you can see this at work.

Anyone who has ever been involved in an office move will realise how difficult it is to get people to change where there is little perceived benefit to the move. People will use all sorts of guerilla tactics to stay where they are.

People, like myself, involved in technology changes will know how difficult it is to get people to see the benefit in new technology especially if they perceive that they are losing something at the same time. Microsoft dramatically underestimated the impact of loss aversion when they decided to get rid of the start button in Windows 8. It didn’t matter how much value Windows 8 could have given people they were losing something and that is what all the commentary focussed on.

Think about all of those piles of paper that you have in your house and ask yourself why you haven’t thrown them out? Loss aversion is a significant part of that, the fear of losing something important is greater than the benefit of having a tidy house.

In an earlier post I talked about the Council of No, one of the reasons that we create these organisations is loss aversion. We spend much more time trying to mitigate the risk of losing things than we do on the value of gaining things. It’s also one of the reasons that we create numerous checklists.

Loss aversion isn’t something that we can get rid of, but it is something that we should try to recognise and work around.

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