Mike Szczepanski — Unsplash

Loss , sometimes known as ‘the prospect theory’, is a type of cognitive bias which is commonly used in and marketing areas; it’s often referenced by economists rather than psychologists.

When we talk about aversion, it’s not as simple as looking at how people hate losing. Instead, it’s how people hate losing more than they like winning. In other words, it focuses on how people hate losses more than equivalent gains.

This can lead us to fearing loss, even when that fear isn’t justified. The idea of just losing out can make us commit to, or invest in, something.

Loss Aversion

The concept of loss aversion was first published in a 1984 paper entitled “Choices, Values and Frames” by the economists Kahneman and Tversky. They carried out a series of experiments that showed people tend to fear a loss twice as much as they are likely to welcome an equivalent gain.

Value function in Prospect Theory, drawing by Marc Oliver Rieger

Let’s take an example: that last doughnut in the office. How good do you feel when you have it, in comparison to how bad do you feel when someone else does?

When you get that doughnut, it’s great, but once eaten, then that’s that. On the other hand, I personally think about that doughnut for the rest of the day if I don’t get it!

The loss hits harder than the gain.

Monetary loss aversion

Neuroscientists Benedetto De Martino, Colin F. Camerer and Ralph Adolphs conducted an experiment in 2010 to understand why we feel this way.

In the task, subjects were asked whether or not they were willing to accept a variety of monetary gambles, each with a different gain or loss. There were two groups of participants, the first group had damaged amygdala (a part of the brain) and the other group’s participants didn’t.

For example, participants were asked whether they would take a gamble in which there was an equal probability they’d win $20 or lose $5 (a risk most will take), and if they would take a 50/50 gamble to win $20 or lose $20 (a risk most will not accept).

They were also asked if they’d take a 50/50 gamble on winning $20 or losing $15 — a risk most would again reject, “even though the net expected outcome is positive,” Adolphs says.

The study found that the amygdala-damaged participants took risky gambles much more often than subjects who had no amygdala damage. In fact, the first group showed no aversion to monetary loss whatsoever, in sharp contrast to the control subjects.

Amygdala

What is the amygdala?

The amygdala is a small area in the brain which has a primary role in the processing of memory, decision-making and emotional responses.

When you step back and realise that the one place where decisions are made is also where our emotional responses emit from it’s understandable why we are so influenced by biases like loss aversion.

A tale of two pizzas

In another study in 2002 called “a tale of two pizzas” by Irwin P. Levin et al., consumers were asked to either build up a basic pizza by adding toppings or to scale down from a fully loaded pizza by removing ingredients.

Consumers in the subtractive condition (the ones who were asked to remove the ingredients) ended up with pizzas that had significantly more ingredients on them than those in the additive condition.

This is a clear example of why we fear losing out because removing ingredients led to a fuller pizza, rather than adding toppings on as the consumer could see what they were losing out on.

How is it used in digital products?

Let’s take Netflix as an example. More specifically, their front page where it says “cancel at any time” and “join free for a month”.

How often have you finished that free trial and then just carried on paying for it? Part of this can be down to the loss aversion bias as by cancelling your account you’ll miss out on all Netflix has to offer.

This tactic is used in most businesses, such as Amazon and their offer of a free trial of Amazon Prime.

Sticking with using Amazon as an example, how do you feel when you see phrases on a product page like “only 1 hour left to order for next day delivery.” and “Only 2 of this item left in stock!”?

These messages imply that you’ll either lose next day delivery or that you might not be able to order the item at all if you don’t order it right now.

Designers are tapping into the fear response, causing people to make snap decisions because they don’t want to feel like they’ve lost out.

How to avoid loss aversion

It’s quite difficult to avoid loss aversion, as it’s tightly integrated into our psyches. When you’re faced with a decision, try to be rational and remember that you say “no” to things you don’t really need to save yourself from wasting money.

Losing something is a rational fear, but it’s important to weigh up that emotional response against the potential gains. For example, if you don’t take that free trial offer you could save yourself £100’s in the long run, so are you really losing?

The main way to conquer the loss aversion bias is through self-awareness and understanding the context the next time you make a decision.

Designing products with this bias

If you’re designing experiences, be mindful of this bias, as it can help improve product engagement and conversion. This bias also makes people more likely to stick with what they’ve got unless there is a good reason to change or switch.

If you’ve got an app that has a long sign-up form with lots of questions, this requires a lot of time commitment from the customer, which could impact your conversion negatively as people won’t want to spend ages filling the form out.

Instead, if you create an experience with minimal on-boarding that’s easy to use, then you’re more likely to get users interested in the product who will give you their full commitment for the long term as they won’t want to lose out.



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