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Loss Aversion

Loss Aversion Definition

Loss aversion was first demonstrated by Amos Tversky and Daniel Kahneman in 1984. This principle refers to the fact that the negative emotions experienced from the pain of losing are psychologically about twice as powerful as the positive ones experienced from the pleasure of gaining. In other words, the idea of losing or giving something up provokes a stronger reaction in us than the possibility of gaining something. The avoidance of loss is therefore a strong motivation for us and can lead us to act in certain, sometimes irrational, ways in order to avoid losing out on something.

This desire to avoid the negative feelings associated with loss explains other cognitive biases that also influence our behaviour, such as the Sunk Cost Fallacy, which describes the way in which we prefer to continue on with something as a result of previously invested resources of time, money or effort, even if we are no longer satisfied with it. The Endowment Effect is also closely linked, explaining the way in which we place higher value on something we already own than something that isn’t in our possession, even if they’re identical, simply because we don’t like the idea of giving up or losing something we consider to be ours.

One example of Loss Aversion we can all relate to is when you sit through the most terrible movie you’ve ever seen in the cinema simply because you’ve already paid for the ticket and invested your time and effort in going there so you feel as though you would be losing out if you left half-way through. In reality, that money is already gone and you won’t be getting it back either way so the rational decision would be to leave and cut your losses, pursuing instead another more pleasurable activity, but the pain of losing makes us act irrationally as we choose not “losing” our money over the possibility of gaining more pleasurable time. We make this biased decision because the brain is telling us that not losing out on something is better than gaining something.

Loss Aversion is utilised in sales and marketing to influence and motivate consumers’ buying decisions. If you are able to make your customers feel as though they are going to “lose out” on an offer, this is likely to motivate them to complete their purchase. This strategy is often seen in online marketing through the use of motivational phrasing such as “offer not to be missed” or “only 2 rooms still left”, etc.

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