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.