Is Loss Aversion a Real Thing?

Rishi Rawat Blog Posts Leave a Comment

Sure it is.

Do I (the reader) suffer from it? Yes, you do.

Let me prove it. Which option would you pick between 1 and 2 below?

Option 1: Get $900

Option 2: Take a 90% chance of winning $1,000 (and a 10% chance of winning 0)?

If you picked option 1 you have a full blown case of loss aversion because the outcome of option 1 and 2 are identical. Don’t feel too bad, I picked option 1 too. It isn’t our fault, these are deep-rooted cognitive biases.

Can I, as a marketer, use loss aversion to convert more shoppers? Yes, and I’m glad you asked.

Instead of phrasing your marketing message as “buy xxx and save $100” phrase it as “don’t lose $100. Buy xxx.”

Are you still struggling with option 2? I know I struggled with it. Because in my head I didn’t understand how a 90% chance of winning $1,000 equals $900. If I have one chance then I either get $1,000 or $0. $900 option doesn’t make it into the equation. Economist Daniel Kahneman has a suggestion: thinking in terms of probability only works if you realize we are going to be making multiple probability bets in the course of a lifetime. Don’t think about this one gamble, think of it as 100 such similar gambles with a 90% chance of winning $1,000. Obviously, people don’t look at things that way, which is precisely why nearly everyone picks option 1.

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