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✍️ Would you take this bet?

You are offered a gamble with a coin. Heads, you win $150; Tails, you lose $100. Would you take the bet?

Truth is, most people wouldn’t. Hmm… But why? Does it make logical sense?
Well, not so much. Let me explain.

If you take a minute to analyze the situation, from a mathematical perspective, you will conclude the outcome of the bet is positive! The expected value of the bet is $25, so theoretically, you stand to win something.

So why do most people reject the offer?

🧠 This happens because of the cognitive bias called “loss aversion”

This is a psychological incident where people tend to strongly prefer avoiding losses rather than acquiring equivalent gains. Simply put, people have a deeper emotional response to the pain of losing something rather than the pleasure of gaining something of similar or greater value. For the example above, losing $100 seems worse than the possibility of winning $150.

This cognitive bias is closely tied to Prospect Theory, a framework developed by Kahneman and Tversky, that explains how individuals make decisions under uncertainty. They introduce the idea of a reference point, often the current state or status quo, against which potential outcomes are evaluated. The significance of this reference point lies in its ability to influence how gains and losses are perceived. Loss aversion, as described by Prospect Theory, says that losses weigh more than equivalent gains.

Moreover, loss aversion has a neurological effect as well. The amygdala, a part of our brain that deals with fear, also kicks in when we feel a strong aversion to losing things. However, whether it's spotting a spider or facing the possibility of losing money or things we like, our body reacts similarly. This brain response releases hormones like adrenaline and cortisol, getting us ready to protect ourselves and avoid harm. This shared neural and hormonal response underlines the challenge of resisting loss aversion. It's like our brains are automatically wired to be scared of losing things.

But what does that mean for your business?

To apply the “loss aversion” bias to your advantage, you should pay close attention to how you frame your offers and call-to-actions. Almost in every scenario where your customers stand to win something, it’s highly probable that they could lose something as well.

Sounds confusing? No worries. You’ll see some practical applications below. But first, real-life examples for you to see what is possible and what is being done already.

💡You are faced with loss aversion every day!

Limited Time Framing:

This website uses the principle of loss aversion because the offer has a time constraint. After the countdown goes to zero, customers will not be able to get the deal. Hence, they get the feeling that they would “lose” the price savings, sparking the desire to take action and avoid losing the opportunity to save money.
(PS: This framing also uses another influence principle called Urgency. We will dive deeper into this at another time.)

Savings Framing:

Walmart offers a special deal where people can save $35 when they open a Walmart credit card and spend $75 directly on that day. They added a time constraint (end date of the campaign). Thus, people need to act quickly and spend the 75$ on the same day they open the credit card, to get the savings. Which of course will incite action and minimize procrastination.

✅ How to apply this to your business

1. Frame offers from a “loss or savings” perspective, instead of gains:

Instead of saying:
“Subscribe to our newsletter to gain (get) a $10 discount on your first order”

Use
“Subscribe to our newsletter to not lose your $10 discount on your first order”
Or
“Subscribe to our newsletter to save $10 from your first order”

2. Create a loss framing when having opt-ins and prompt for active decisions.

Instead of just having an opt-in box with one option:
“Check this box if you want to get a medical check in winter and save $40.”

Prompt people into making an active choice between two options and frame the options with gains and losses.

• “Yes, I want to get a medical check in winter to prevent any possible health issues and save $40.”

• No, I don’t want to get a medical check in winter, even if I might increase the chance of getting sick, and I don’t want to save $40.

The example above is an illustration of a study published in the Journal of Consumer Psychology (2011), this change resulted in a 75% opt-in rate vs. 42% with only the opt-in box. This happened because people didn’t want to lose the benefits. And the effect was even more prominent when they had to actively choose to lose the benefits. Powerful, right?

3. Add time, stock, or similar constraints to the conditions of your offer, so people are more prone to take action

Instead of saying:
“20% off from all our winter collection”

Use
“20% off from all our winter collection until 31.01.2024”
Or
“20% off from all our winter collection, only while supply lasts”

📖 Further information or sources for you to dive deeper into it

Here are some resources and information for you to dive deeper into this topic.

• Thinking Fast and Slow - Book by Daniel Kahneman

• Loss aversion in the investing world 

• Different academic papers and research

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Thanks so much for reading,

Juan Diego

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Please use these insights & knowledge ethically and with respect. 

One last thing…
Next time, we will talk about a bias that makes us act irrationally. A bias that drives us to pay crazy amounts of money. Are you thinking of double or triple the price? Try it more like a 900% markup. Why? Stay tuned for the next one to find out!