THINKER'S ALMANAC - December 9

Subject: Loss Aversion - Coin Toss

Event:  Carl Richard pens New York Times article on loss aversion.

If owning stocks is a long-term project for you, following their changes constantly is a very, very bad idea. It's the worst possible thing you can do, because people are so sensitive to short-term losses. If you count your money every day, you'll be miserable. -Daniel Kahneman

On this day in 2013, an article appeared in The New York Times entitled “Overcoming an Aversion to Loss.”  The writer of the article, Carl Richards, begins by quoting Lance Armstrong:  “I like to win, but more than anything, I can’t stand the idea of losing.  Because to me, losing means death.”

Richards argues that Armstrong’s dislike for losing is universal in humans.  It’s called loss aversion, and it basically means that “we feel the pain of loss more acutely than we feel the pleasure of gain.”

To further illustrate the point, Richards turns to the psychological research of Daniel Kahneman and Amos Tversky, who came up with a simple experiment to document the reality of loss aversion in ordinary people.  The researchers offered their subjects a bet on a simple coin toss.  If the coin falls on tails, you lose $10.  He then asked the subjects how much they would have to gain by winning in order to take the bet.  On average, subjects want at least $20 for a win before they will take the bet.  In short, this experiment reveals that the pain we experience from a loss is twice the amount of pleasure we feel from a win.

Loss aversion is a specific phenomenon that’s a subcategory of a larger effect known as negativity bias.  In short, “Bad is stronger than good.” When it comes to the human species, negative experiences have a greater impact on us than positive ones; humans are hardwired to see the glass as half empty rather than half full.

The positive side of loss aversion and negativity bias is that they give us keen insights into human nature, insights we might be able to use for more effective persuasion.  For example, if it is true that losses are perceived as greater than gains, we should not just focus on the advantages of a proposition, we should instead focus on how the proposition might help us to avoid disadvantages.  If we are selling a toothbrush, we might go beyond just showing the bright smile it will give the customer; in addition, we should show how it will help alleviate the terrible tooth decay that the customer might experience without it.  Because we are cognizant of negativity bias, we might see how the bad effect (tooth decay) is more powerful than the good effect (bright smile).

Because loss aversion tells us that the fear of losing money is more motivational than the prospect of gaining money, we might consider framing a sales pitch around this psychology.  For example, instead of focusing on the money a customer will save by buying our toothbrush, it might be smarter to focus on how much the customer will lose if they don’t buy it.

Challenge:  The Half Empty Appeal:  Do some research on advertising for specific products.  Look specifically for examples of how marketers appeal to losses or disadvantages in order to capitalize on loss aversion and negativity bias.

Sources:

1-Richards, Carl.  “Overcoming an Aversion to Loss.” The New York Times 9 Dec. 2013.