Question

Loss aversion: the value of loss aversion in marketing

Answer 1

What is loss aversion?
How does loss aversion work?
Explanation of loss aversion with examples
Loss aversion in marketing
Other relevant effects for marketing

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Loss aversion: the value of loss aversion in marketing

We tend to give more importance to a loss than a gain of the same magnitude. This cognitive bias, called loss aversion , is part of the great psychological insights of so-called behavioral economics . Irrationally avoiding losses in unsafe settings makes evolutionary sense and probably goes back to the days of hunting and gathering..

Here's what the phenomenon of loss aversion entails and why this psychological effect plays such an important role in marketing.

Index

1. What is loss aversion?
2. How does loss aversion work?
3. Explanation of loss aversion with examples
4. Loss aversion in marketing
5. Other relevant effects for marketing

What is loss aversion?

As a customer or entrepreneur, every day you face cognitive biases that influence, distort and transform your perception , your thinking, and your memories and judgments . One of these biased perspectives is the so-called loss aversion, which unnecessarily complicates the management of profits and losses. Loss aversion is characterized by the predisposition to value a loss more than a gain . Thus, the anger at losing 100 euros is generally greater than the joy at winning that same sum..

For this reason, aversion to loss is especially important in marketing: to optimize results, you have to present the probabilities of profit to your customers and put aside expenses and obligations.

Loss aversion is a central element of prospect theory , developed in 1979 by psychologists and economists Daniel Kahneman and Amos Tversky. In 2002, both researchers were awarded the Nobel Prize for their common work; in Tversky's case, it was posthumous recognition..

Definition

Loss aversion defines the psychological and economic effect of tending to value a loss more than a gain.

How does loss aversion work?

The definition of loss aversion makes one thing clear: this cognitive bias has a tremendous influence on marketing and surrounding disciplines. The key word in this context is the? Irrationality ?: For a long time, the idea that the economic thinking human being (the so-called homo oeconomicus ) acts rationally and maximizing his utility reigned among economists . However, the phenomenon of loss aversion shows that people make decisions irrationally, especially when their insecurities come into play.

Insecurities are responsible for assigning a higher value to the possible losses derived from a decision than to the potential gains. From the perspective of the decision-maker, on the scale, losses weigh approximately twice as much as gains of the same magnitude . Kahnemann and Tversky explained this fear of losing: people do not value an investment (for example, a house, stocks or a product) according to the end result, but rather in relation to a so-called benchmark , which is, for usually the time of purchase.

Explanation of loss aversion with examples

A classic example to illustrate this cognitive bias is the taxi driver paradigm of American economist Colin F. Camerer. Their 1990 empirical study confirms the Kahneman and Tversky loss aversion hypothesis. Camerer studied the competition that existed between taxi drivers in the concrete jungle of New York City, analyzing the instability of their income and working hours.

Finally, he found that experienced professionals, such as taxi drivers, also behave irrationally when it comes to the economy, since they are people who fear loss. On days with a high demand for work , taxi drivers should work harder to make up for days of low work. However, the opposite happened: taxi drivers set a fixed billing target for each day and lengthened their working hours on the days when demand was lower to reach their daily target.

Another well-known example of loss aversion is the closely related endowment effect , which explains why we place more value on the things we own. In turn, the endowment effect confirms the existence of the principle of loss aversion. Thus, the endowment effect can be used in marketing in isolation or in combination with loss aversion.

Loss aversion in marketing

Loss aversion is particularly present in the pricing and promotion categories, and even extends to the field of product development. Just as significant is the importance of this cognitive bias in the fields of marketing and sales psychology . Here are the marketing methods that benefit from loss aversion:

• Discounts, vouchers and prizes
• Trial phases and free product samples
• Possibilities to reserve new products
• Exclusive mailing lists for certain products
• Social demonstration and? Fear of missing something?
• Priority and shortage communication (actual or suggested)
• Track shopping cart and unfinished orders

The formulation and the words used are also essential :? Save 100 euros right now? is, for example, a more elegant formulation that? Get 100 euros more profit thanks to this product ?.

Loss aversion is such a broad concept and brings with it so many aspects that it is misused by its overuse. You just need to take a look at the typical advertising claims:

• ? Available today only and exclusively?
• Only X products left?
• Do not miss this opportunity: buy now?

Such shortages of time or products, pressing calls to action, and countdowns or deadlines are some of the effective marketing principles that are associated with loss aversion. However, the duration of their effect is usually as limited as the measures themselves. Therefore, playing on loss aversion from customers is a useful one-time tactic, but not a sophisticated long-term strategy. Using this cognitive bias in marketing is wise and important, as long as it is not abused, as the longer a customer is subjected to shortages and time pressure, the more insensitive they become.

Note

In practice, combining loss aversion with carry-over effect is highly effective: by using the positive example of the already convinced customer, it is? Mitigated? buying pressure on a psychological level.

Also with freemium business models or other forms of account upgrading you can take advantage of loss aversion in marketing. During the testing or use phase of the product, the company offers an additional valuable and useful function for customers. In order not to give up an attribute (such as the quality of the product or its possession), customers will have to purchase such a model.

Other relevant effects for marketing

The irrational behavior of people in situations of uncertainty that so well describes loss aversion can be used to advantage by marketers. In combination with knowledge of other phenomena, such as the anchor effect, the halo effect or the IKEA effect, the success of some long-term marketing campaigns can be maximized with relative ease .

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