Jan 12, 2018

Exploit Explained: Loss Aversion

{This post is part of the Archive of Human Exploits}

Let's play a game. I'll toss a coin. If it's tails, you lose $100. If it's heads ... well, you decide. How much would I have to offer before you'd be willing to play?

Most people, it turns out, say $200. In other words, the potential gain has to be twice the potential loss for them to play. This lopsided effect is known as loss aversion.

Coined by psychologists Daniel Kahneman and Amos Tversky as part of their larger, Nobel Prize-winning concept "Prospect Theory," loss aversion says we feel the pain of losing much more intensely than the pleasure of winning. As a result, we go to greater lengths to avoid loss than to achieve gain.

In the video above, former FBI hostage negotiator Chris Voss explains how understanding this exploit is useful in the context of a negotiation. More broadly, Voss believes almost all human behavior is driven by some variation of the aversion to loss, and that getting to the bottom of why is the key to communicating with people in an emotionally intelligent way. He explains this and more in his best-selling book, Never Split the Difference: Negotiating As If Your Life Depended On It.

There are many other areas where the loss aversion exploit is useful and used. Wikipedia cites a classic example: Would you rather get a $5 discount or avoid a $5 surcharge? It turns out that the "same change in price framed differently has a significant effect on consumer behavior." People are more motivated to avoid the surcharge than they are to claim the discount.

Life coach Tony Robbins uses the recognition of loss aversion to help people see the way forward to success. "For most people, their fear of loss is much greater than their desire for gain," he says. "Most individuals would work much harder to hang on to what they have than to take the necessary risks to shoot for their dreams." Robbins antidote is intensive, multi-day seminars that can last up to 14 hours per day. In doing so, he instills a desire for gain much stronger than 2X in order to overcome this exploit's powerful pull.

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