Loss aversion makes change difficult


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Let’s play a game of toss. If you tossed a head, you will win $100 but if you tossed a tail, you will lose $70. Would you play? If you were purely rational about this decision, you should play, because the expected value is (0.5 x $100 – 0.5 x $70) = +$15. But as it turns out, many people wouldn’t play this game. This is because the pain of losing $70 was far worse than the pleasure in gaining $100. In fact, researchers have found that it would take a far greater amount of pleasure – in the region of two to four times – to overcome the pain of losing. This is called loss aversion.

In a famous experiment, half the class in a university was randomly given a mug with the university logo, and the other half got nothing. Those who got nothing were then asked to make an offer for the mug, to buy it off the person who had it. The average offer price was $2.87. The experiment then went on to those who held on to the mug and they were asked to quote a price that they would be willing to let go of the mug. The average price was $7.12! This was a great price disparity for roughly holding on to the mug for about ten minutes. This is another version of the loss aversion bias.

What does this mean for us?

A lot of people will resist change because they have become used to the status quo. Even if the status quo was far less than ideal, they have come to claim it for themselves, and the changed position would have to be far better than the current – in the range of two to four times – for them to embrace the new position. This does not affect everyone, because people who are purely rational will be able to choose the better position; but being humans, we are affected by emotions that tend to sway us away from the rational, and this means the loss aversion will affect a large majority of us.

So what do we do?

As it turns out, we need to appeal to the head first, painting the picture that the new position, though not two to four times better, can be one to two times better. If we cannot show that the grass is greener on the other side, chances are we will not be able to make the change.

Next we will need to show how to get there. Locate people who are already doing the “new” thing you are trying to introduce. These are called bright spots and they will help you in overcoming the loss aversion when they share that the grass is indeed greener.

Lastly, map it out for them. Don’t simply say, “Okay, guys, now you know where we are headed, go for it!” They would still stay where they are. You have to help them cross over in a painless manner, mapping the steps for them, and celebrating quick wins. This will plot more pleasure points along the way, thereby increasing the overall positive experience, and overcoming loss aversion.

Loss aversion is a strong emotion that we should all be aware of. It keeps us rooted to where we are, many a time in a spot that is not ideal. This is what keeps people in a job where they should have moved on from so much earlier, or in a relationship that they should have exited much sooner. Loss aversion surely does make change difficult.

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