Saturday, February 25, 2012

Loss Aversion

The pain of loss is felt so deeply at an emotional level that we tend to go out of our way to avoid this feeling at all costs. Amos Tversky and Daniel Kahneman demonstrated this experimentally with testing. This is referred to as loss aversion, the act of trying to remove or reduce the sensation of loss with the aim of making gains. This persuasive force is so powerful that sometimes we base important decisions on it, without a more rational thought to the consequences.

Of course the advertisers and marketing types all are aware of this force and use it to their advantage when they feel they want to play some persuasion games. They like to get you to take free gifts and have things sent to your home to try, and return if you are unhappy, how often have you returned that item you had delivered? Think also about gambling and the power of the casinos to help people keep putting more money down to just make back all those losses.

It has been suggested by Kahneman and Tversky that this force is twice as powerful as the feeling of gain, and that makes it very effective and important in peoples decision making. It has also lead to belief that people generally over valuing things they already own, more than their material worth. Some have questioned the actual existence of loss aversion, and I am sure that it does not always apply in all instances, such as small pay off situations, situations that have large delays and non competitive scenarios. However, I definitely believe that there is something to the idea and have certainly experienced the sensation first hand in watching my money on the stock market or deciding to give old stuff to a donation center.

The power of ownership and the feeling of lose are definitely not good feelings and although we can over come them with rational thinking, we all know we are not always in control of those decisions consciously. Next time you order a product online or receive a gift from a company and realize that it is not quite what you wanted, ask yourself why you don't want to send it back, is it because of the inconvenience, or just maybe you don't want to loose out having something you now own.

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