Give a monkey an apple and you’ve got a happy monkey! Give a monkey two apples, and it’s even happier. Not twice as happy as the first monkey but two is still better than one even in monkey mathematics! Where things get interesting is what happens to the monkey with two apples when you take one away…
If you ran this test with two monkeys at the same time, give one an apple and give the other two but then take one away, both monkeys end up with one apple at the end. Logically we would expect they should both be at a similar level of happiness since they both now have an apple each to enjoy and neither had an apple at the start of this test.
When scientists actually run this experiment however, it shows that the monkey we took one apple away from is far less happy than the monkey that only received one apple to start with. We basically end up with a brooding monkey pining over the two apples that could have been!
This is known as Loss Aversion Bias and it’s a powerful tool in understanding how we behave and react to certain situations.
Loss Aversion is how psychologists describe our mental preference to rate losses as more important than identical gains. In other words, we feel more pain when we lose than we feel joy when we gain.
So why does Loss Aversion matter and who cares about monkey apple math anyway?
There is a wonderful Veritasium video experiment out right now that shows this exact concept and how it applies in everyday life. Complete strangers are asked on the street to wager $10 on the flip of a coin. If they win, they get $10. If they lose, they have to give $10 of their own money. All turn down the interviewer and with the odds being 50/50 who can blame them. What’s interesting is when he starts to up the ante. What about your $10 to my $12? How about $10 to my $100? All of them turn down the wager even when the odds are stacked in their favor because they can’t stand the thought of losing their $10! Loss Aversion in action! They rate the pain of their possible loss as higher than the joy of what they might gain.
Most eventually take the bet in the end but only when the potential gains are WAY higher than what they could be losing.
Now we can argue that people make poor choices because they don’t understanding odds or risk but Laurie Santos, who studies primate psychology and is the Director at the Yale Cognition Laboratory, has some research that suggest this may be a deeper issue. She has a fascinating TED talk you can watch here where her team taught primates to use currency to see if they would make the same bad financial decisions that stock brokers seem to make over and over again. In her talk she does a great job of summing up Loss Aversion with this example:
Imagine I give you $1000 in cash. Ten crisp $100 bills you can now put in your pocket and spend how you want. Now I give you a choice to get even more money.
Choice 1: I flip a coin – HEADS you get another $1000 – TAILS you get nothing
Choice 2: I hand you another $500
Most people when presented with this choice will choose the guaranteed $500 extra in Choice 2. In Choice 1 they might get $2000 but they may only get their original $1000. Choice 2 they are guaranteed $1500.
Now let’s ask the question in a different way. Imagine I give you $2000 in cash, and you now have to choose how to lose money.
Choice 1: I flip a coin – HEADS you lose $1000 – TAILS you lose nothing
Choice 2: I take $500 away from you
Now what do you think people choose? As soon as you frame the question around losing money, people get a lot more risky. In the first example, most people take the safe bet of an extra $500. In the second example, most people take the riskier choice of gambling with the hope of keeping the whole $2000. When you frame the decision around Loss, choices change.
So we see that people avoid taking risk that favors them and miss out on favorable opportunities due to Loss Aversion. We see people make risky choices trying to prevent loss due to Loss Aversion. How can one concept cause us to both avoid good risk and increase bad risk?
Well, there’s a second item at work here called Framing. Framing and Loss Aversion go hand in hand in many studies because how you frame a possible loss can influence what choices people make.
Framing teaches us that we can change people’s choices just by changing how we ask the questions!
Loss Aversion shows us that we are wired to feel loss as more painful than gains. Framing around loss affects the choices people (and monkeys) make. Now think about how you can use Loss Aversion and framing to alter your life and your results. Start to look at how you ask questions, make sales pitches, or any other area in your life where you are asking people to make choices.
“This trick helps you keep customers” is not as powerful as “You’re losing customers without this trick”
“Are you tired of losing money?” is better than “We help you save your money”
Are you making a big change in your life or organization? Talk at least as much about what is staying the same (avoiding losses) as you do about what’s changing. Remember, people feel loss more strongly than gains so the “same” message probably will have to be communicated a lot more than the “differences” message.
Think about the last time you saw a company re-brand and heard the message “The only thing different is the name!” I love that tag lines because I instantly get the image of a massive amount of consistency and very little that I need to give up from what makes me comfortable. That’s a message framed around Loss Aversion that reminds us that we can keep nearly everything we want to as customers.
So how can Loss Aversion and Framing change the way you interact with people? What ways can you re-frame your situation to either focus on or minimize the loss?
I want to hear about other examples you can find of companies using Loss Aversion to their advantage. Comment bellow and if you find these articles interesting or helpful, please share them with people you know. You can link them on Facebook, Twitter or Google+ by clicking the links bellow and don’t forget to sign up for our free news letter so you never miss an article.