Photo by Markus Spiske on Unsplash
Author:@aestranger
Reading time: 11 minutes
The idea of loss aversion has a somewhat negative connotation to it. So why then would you want to engage your audience with this technique it is a negative?
Well, loss aversion, like so many engagement techniques, actually has two sides on how it can be used. And with so many ‘powers’, it can be used both for good and for evil. It simply depends on how you wish to use it, and often using a technique that has a negative, such as a consequence, can motivate your audience towards a positive outcome.
In this piece within my continuing series on audience engagement and experience design, we’ll look at the uses of loss aversion and the associated sunk cost (fallacy), and how these can be used with your audiences.
A quick summary of what I’ll be covering in this piece:
Before we continue, we need to understand what loss aversion is.
Obviously, its definition is pretty much in the name, it’s the act or sense to avoid losing something. But the psychological effect is somewhat more complex than simply avoiding a loss. One of the best examples I’ve come across in describing what loss aversion encapsulates is in Daniel Kahneman’s book Thinking Fast and Slow.
Within the book, and I’m paraphrasing here, he describes a situation that essentially gets to the core of what loss aversion is. The example is basically a circumstance of framing. In the example an individual can choose between gaining a 10 euro discount on something or avoid losing 10 euro’s on something. What the example comes down to is that depending on how it is framed, people will be more motivated to avoid the loss of the 10 euro’s than they would be on saving the 10 euro’s.
The thinking behind this is that people already have the 10 euro’s, that value is in their possession. So, therefore, should it leave their possession, the sting of the loss is greater than if it were to simply remain there due to a saving of the same amount.
And I know it sounds crazy, or unbelievable, but for many of us, the rationalisation of an activity can take some strange turns. Depending on how it is framed, if I were to offer you something and I framed it to you as you saving 10 euro’s or avoiding a 10 euro charge, you would likely go for the avoiding the 10 euro charge.
Let me try put it into a more real-world and comprehensible example. Booking websites, for hotels and holidays, use the loss aversion technique quite heavily. Website’s such as Booking.com will often display next to the Book Now button a ticker that informs you how many are looking at this offer and how many have already booked this one or a similar one in the last few minutes. What this means is that if you don’t book now, you will likely lose your chance of booking the ‘good’ offer.
The majority of people will feel pushed to make the booking now rather than later, so that they can avoid losing out on the current offer. If this sounds familiar, then that’s because this is essentially the state that we have come to know as the fear of missing out, which I’ll cover a little bit later.
The associated experience that comes with loss aversion is the sunk cost (fallacy). The fallacy is added to this statement because it’s usually the case that the individual falsely attributes more value to something than what it is worth.
The reason this occurs is that we all invest time, money and effort into a great many things. I may invest hundreds of hours into an activity, such as nurturing a plant or playing a game. To me, both things have a far greater value than they would have to anyone else. I may have nurtured a tomato plant until it bears fruit, because it took me months the value of the tomatoes is disproportionate to what someone would normally pay for them. Similarly with a game, to me, that save file represent hundreds of hours of time and effort, but to someone who has no interest in the game, that save file is essentially worthless.
The positives of a sunk cost are that you or an individual is willing to invest large amounts of time, effort and money into an activity because there is worth in doing so. And the more that is invested, the greater the value becomes. This leads to continued retention and loyalty for quite a few things.
The negative of sunk cost is the double-edged blade. Because of your large investment in something, you may become biased and over-value its worth. This can lead to not being able to let go of something despite its overall lack of value, for example, an old car that is essentially a death trap. But you wish to keep it around because of the time and money you’ve spent in keeping it going, not to mention the memories associated with it.
The positives of loss aversion are that it can certainly motivate people into action in a very short amount of time. A very acute sense of agency and urgency is created when people wish to avoid a loss of some kind, especially when there is a perceived value to it.
Though you need to be very careful when using loss aversion, as the line between constructive motivation and forced coercion is very thin. As the emotions that are evoked are fear and this can lead to anger. People will readily take action to avoid losing that which they’re invested in, however, if the task of avoiding that loss is too great or the loss occurs, then your audience will become angry and alienated.
And this isn’t simply the case with large investments, even with small ones people will take to heart if they lose it. So, be very careful when implementing anything that has a sunk cost with the loss aversion technique.
One of the main drivers behind loss aversion is FOMO or the fear of missing out. FOMO has become a bit of a trendy word recently to describe parts of the ‘instant satisfaction’ culture that has arisen in modern society. And therefore it is also an easy one to understand, as we will likely all have felt or have seen an example of FOMO.
In essence, anything we have a vested interest in will cause us to feel FOMO if there is a chance that it will go away. This fear though is not primal, it’s a modern fear, and this is why the brain can often not distinguish properly between life-threatening problems and other lesser issues. As I stated previously, the problem that can arise is that your audience could become angry with the loss aversion technique and FOMO. The reason for this is the primal and modern fears, the lizard brain cannot separate it, and thus you should be cautious when you cause your audience FOMO.
Some of the pitfalls with loss aversion that can occur are when organisations and companies decide to change something that wasn’t communicated to their audience or something that wasn’t as transparent to their audience as they had thought.
For example, loss aversion can be exaggerated in the wrong direction when an initial offering had had a cost but is now being given away without that cost.
Let’s say that your company or organisation has a service or product that you initially sold for money. But somewhere in the corporate structure, a decision was made to make this service or product free for your audience. The issue that arises from this is that your current audience will feel cheated and be angry. As they will have invested in your product or service, both time and money, and now it will feel like that they have lost their money because it is now free for all new audience members.
This issue can be further exacerbated if your organisation does this quietly and secretly. The outcome is that your audience will be alienated and they will have lost trust in you. The loss aversion here is not of avoiding something that will be lost, here it is that they have the aversion to what they have now lost. We have essentially skipped the fear part and gone straight to anger, and since the lizard brain can’t distinguish these types of fear, we could probably say the anger is akin to unexpectedly losing a good friend (in terms of the chemical effect in our brain, rather than the psychological effects of such a traumatic experience).
So how can you solve this and avoid such a strong negative reaction from your audience? Well, be open and transparent about your plans and your roadmap. It doesn’t need be that way from the start, but when the decision is made, make it public and give your audience time to adjust to the change in the status quo. You could also offer a refund if your audience hasn’t been made aware of it ahead of time. Refunds are good because, in the end, you’re giving away the service or product for free anyway, so it’s best not to make it look like you’re stealing from your current audience. If your audience takes it, then it’s a minor loss, but much of your audience will likely just appreciate the gesture, and not opt for the refund. In the end, both you and your audience can maintain the trust that you have fostered.
Loss aversion is a useful technique to motivate and engage your audience, but you’ve hopefully seen that it is a technique that you must use with care. One wrong step and your audience can turn on you.
As your product or service will likely have value, once your audience has acquired it, they will add their own intrinsic value to it. As they invest more into it and there is a sunk cost, their loyalty to you will increase in kind.
You should see this as a symbiotic relationship, where you and your audience work together to improve. Their sunk cost in your product or service and loyalty to your company should not evolve into something that could be likened to capitalist enslavement.
As with many techniques that fall into the negative spectrum of audience engagement and experience design, this one should only be used over the short term. The fear and anger component, if used too often will tip the balance and the FOMO will simply move to anger.
In essence, this technique can be seen as a carrot and stick method, but sometimes these can be useful. Your audience wants to remain loyal to you due to their investment, and this a good thing, as long as what you offer does indeed improve their lives in some way. It should never be one where you take advantage of them. As with everything I discuss in my blog pieces and articles, the outcome should be a net positive for everyone.
I hope that this piece has given you some food for thought and helped improve your own methods or at least offered a different viewpoint to consider.
Do check out the other posts on æStranger.com, and do leave a comment or contact us if you have some ideas of your own that you wish to discuss or if you would like to see other topics discussed.
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