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This article appeared in June 2018, in Romanian, in BIZ Magazine

The key to Jimmy Connors’ success (ATP No. 1 for 268 weeks, of which 160 – three years! – consecutive) was his credo: “I hate to lose more than I love to win”. At first glance, the discomfort of losing and the desire to win seem the same. Two sides of the same coin. But not for Jimmy Connors.

And I don’t think that’s the case for you either. Let’s say you are an employee and the boss just increased your salary with one hundred euros. Are you happy? Sure! Are you having a party? I doubt it. It’s only one hundred euros, after all. Now think that your boss cuts a hundred euros from your salary. How upset are you? Definitely more upset in comparison with the feeling of happiness you had for the extra money. In fact, it was demonstrated that the pain of losing is psychologically twice as powerful as the pleasure of gaining, even if it’s the same value involved.

This asymmetry is called loss aversion and was discovered and studied by Kahneman, Tversky and Thaler, famous founders of behavioral economics.

But where does this asymmetry come from? Why “a bird in the hand is worth two in the bush”? It seems that this software has been written in our operating system since we lived in caves and had little, but valuable stuff. What our ancestor risked losing if he ventured into a fight with another tribe? Something more valuable than 100 euros, for sure.

His life, his freedom, one hand, his wife. Those who put more value on what they already had (without risking losing) are those who have lived to perpetuate the species. They are our ancestors. We come from very careful people. And this caution, to prefer avoiding losses to acquiring equivalent gains, has been transmitted over time.

Economics and loss aversion

Let’s look at some examples of economic behavior resulting from loss aversion. Sometimes this bias can prevent us from selling an asset at a loss. Some shares, an apartment, some bitcoin. Let’s say you bought an apartment for 120,000 euros in 2007, and now it’s worth about 75,000. You don’t use it (it’s empty), the rent would be quite small and you need money to take a house.

However, you don’t even think about losing the 45,000 euros (the difference between the purchase price and how much you would take on it today). It’s not a very rational approach, but you simply can’t stand the thought. Chances of reaching at the initial price again are low, and you need the money now, not in a few years. The loss aversion is to blame for this blockage.

When selling, we basically accept the loss of 45.000 euros. Is there a way out of this? How can we fool our brain, who wanted to fool us first? Of course, through a mental exercise. Imagine that you don’t have the apartment, but you have the money. Someone comes and says it’s for sale at the price of 75.000 euros. Would you buy it? If the answer is “No way, I don’t need it!”, it means that between the apartment and 75,000 euros, you would choose the money. Well, in your situation, there is a simple way to do this: sell it!

One of the funniest methods that exploits the loss aversion for a noble cause is an app in the United States, Pact, that motivates you to go to the gym. I think you know the common behavior of many people to buy an expensive subscription to the gym and then never go. Well, if the hundreds of euros given on the subscription didn’t get people off the couch, Pact did it with 10 dollars. How?

You set a number of visits to the gym (per week) and Pact checks with the GPS if you went. If you skipped the gym, Pact will take from your card 10 dollars for each absence. The mechanism worked perfectly, with hundreds of thousands of Americans becoming more active due to their aversion to losing 10 dollars.

My daughter told me about another nice example: Forest application helps you not to waste your time on your phone. You set a time slot (2 hours let’s say) in which you don’t use the phone and, during this time, a virtual tree grows. If you enter any other application, the tree dies. It seems that this is one of the most effective ways to combat mobile phone addiction.

Online stores use tricks based on loss aversion to counteract a very common behavior: users browse, choose products, put them in the cart, close the browser and leave. How do you make them come back to finish the transaction? A message through which the buyer is informed that the stock of the product is low and this changes his perception from “I could buy this thing” to “I could lose this thing” and the sale is much more likely to happen.

Loss aversion is the mother of many cognitive biases, the most common being the endowment effect, scarcity effect or status quo bias, exemplified below.

Endowment effect

We value more the things we already have. Even if there is a “no questions asked” product return policy, stores know that once the item arrives in your home, it will be much harder for you to return it.

Scarcity effect

We value more the things that are in limited quantity. Search for accommodation on booking.com and you will see an avalanche of incentives to make you book something faster because there are only a few rooms available. In the next image is a random search of mine on booking.com which I give for example in class and where I indicated four incentives of this effect.

Humans are not rational and fall for it, even I admit that I impulsively bought plane tickets to destinations where I wasn’t even sure I wanted to go just because “there are only two seats left”. When it was announced in the fall of 2003 that flights with Concorde will end, prices went crazy. Even if you had no business across Atlantic, you had to give a lot of money for one of the last chances to fly with supersonic speed.

Status quo bias

We value more the current situation. Whether it’s a way of doing things, a career, a relationship, a software that we’ve been using for some time (and not that new nonsense the management wants to implement), what we have now is better than what we could have, so why change?! This fear of change is also rooted in the loss aversion.

Can we use the apartment trick here too? If I already had the other job or the other career or the entrepreneurial project I keep thinking about, would I go back to what I do now? If my company were already digitally transformed, would I want to go back to the cumbersome systems we use now? If I had already started running or going to the gym a year ago, would I let myself eat fast-food in front of the TV every night, as I do now? I don’t know what you can’t change and I don’t know if this exercise is useful or rather uncomfortable, but what I know is: we are most likely to regret what we didn’t do, so good luck! And have courage!

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