Behavioral Insight 8: Loss aversion

Behavioral Insight 8: Loss aversion

This series focuses on behavioral ideas or theories and how they relate to a specific area within email marketing and e-commerce. In this post we will examine the effects of loss aversion on trades and how it can be used as a powerful incentive.

What is it?

Loss aversion is the tendency for people to avoid risk whenever possible…individuals react more strongly to losing something than gaining something

Loss aversion is the tendency for people to avoid risk whenever possible. There do exist risk-seeking individuals but overall most people are loss averse. It has furthermore been shown that individuals react more strongly to losing something than gaining something. Daniel Kahneman and other researchers have shown this tendency in numerous experiments. In an experiment, Kahneman gave half of the participants a mug and asked them how much money they would sell the mug for. The other half, who did not own a mug, was asked how much they would pay to buy the mug. If individuals were completely rational the amount should be the same on average, but the price that individuals with a mug wanted was an average of $5.79 and people who did not own a mug was willing to pay only an average of $2.25 to own it. This is also called the endowment effect. Items that we own are valued higher than if we did not own them. This is an important insight when dealing with customers and when trying to get recipients to act in a specific way.

Items that we own are valued higher than if we did not own them. This is an important insight when dealing with customers and when trying to get recipients to act in a specific way.

How does this relate to email marketing and e-commerce?

Whenever you are dealing with people, they will have a tendency to value what they own at a relative higher value than you will. Let us take Kahneman’s mug example. If these two groups of people were to participate in a trade, there would occur a mismatch between what the seller wanted for the mug ($5.79) and what the buyer would be willing to pay ($2.25). Unless one of them changes their disposition, a trade would be impossible. For a compromise to occur, the buyer or the seller needs to be willing to either pay more or receive less than they subjectively believe they are entitled to. Knowing this makes it possible to anticipate issues when going into a situation where you are trying to obtain something that others have, or when others are trying to obtain something you have. You know that there is a chance that there is going to be a relative mismatch, and therefore you have the power to be prepared for it. The endowment effect have been shown to be less powerful when individuals are engaging in trades on the behalf of their organization but it still affects even these situations.

Design arguments so that they revolve around losses instead of gains…and so more effectively motivate recipients to act in a specific way than if you used an argument based on recipients gaining something.

Loss aversion also provides you with a powerful tool when trying to convince customers to act in a specific way. In email marketing, this can be applied by utilizing the concept of loss aversion by designing arguments so that they revolve around losses instead of gains. By doing this, the argument will more effectively motivate recipients to act in a specific way than if you used an argument based on recipients gaining something.

For examples on loss aversion arguments see our blog post Why behavioral sciences are important for email marketers.

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