“We strongly prefer to avoid losses over acquiring gains.”

Imagine you loose $100 and I happen to be the lucky guy finding it. Loss aversion tells us that – unfortunately – you became more unhappy than that I became happier… Nobel laureate Daniel Kahneman and his late friend Amos Tversky discovered that losses are roughly twice as powerful, psychologically, as gains.

Therefore: phrasing the same outcomes as though it’s a loss can have a bigger impact than phrasing the same outcome as a gain.

But there’s more magic to the loss aversion effect. The Prospect Theory of Kahneman and Tversky explains that we decide differently depending on whether a choice is framed as a gain or as a loss. When a choice is framed as a loss, we tend to be more risk-seeking in our preferences. However, when the same choice is framed as a gain, we tend to become risk averse.

One remark: recent studies reveal that loss aversion does not apply to all types of choices. For example, it does not work for choices where the outcome is uncertain.

loss aversion loss-gain

Scientific research example:

loss aversion asian disease

Imagine that your country is threatened by the outbreak of an unusual disease. There are 2 po

ssible programs to combat the disease with different effectiveness estimates:

In a group of 600 people,

  • Program A1: “400 people will die”
  • Program B1: “there is a 1 in 3 probability that nobody will die, and a 2 in 3 probability that 600 people will die”

Which one would you choose?

Did you opt for the gamble and take the risky choice that nobody would die? Tversky & Kahneman (1981) found that most (78%) of us prefer to take the risk and choose program B (and only 22% go for the certainty of 400 dead with program A).

What does that have to do with loss aversion? Well, both options are ‘loss-framed’, since they talk about how many people will die. Tversky and Kahneman also studied our choices when they ‘gain-framed‘ the same two programs (talking about ‘saved lives’ instead of ‘people dying’). It looked like this:

In a group of 600 people,

  • Program A2: “200 people will be saved”
  • Program B2: “there is a one-third probability that 600 people will be saved, and a two-thirds probability that no people will be saved”

Now, most participants suddenly preferred the certain option of 200 lives saved (which is rationally the same as program A1: 400 people that die for sure): 72% choose Program A2, and only 28% choose Program B2.

So, framing a choice as a gain instead of a loss, causes our preference to shift from the risky option to the certain option…

More recently neural correlates of loss aversion have been found. For example Tom, Fox, Trepel & Poldrack, (2007) found a broad set of brain areas that showed increased versus decreased activity depending on whether a gamble task was framed as a 50/50 chance of ‘gaining’ versus ‘losing’ money.

Online Persuasion tips:

[checklist]

  • In general: Test with framing a choice in terms what people loose instead of what they gain.
  • More specifically:
    • When you want customers to make a risk-averse choice (such as an existing client that should renew his/her subscription), then phrase your offer in terms what he/she will gain when he buys it.
    • When you want customers to make a risk-seeking choice (such as switching from a competitor to you), then do the opposite: phrase your offer in terms what one will loose when he does not switch.
  • You can use your content and USP’s to either loss or gain frame your offer, but you can also test with visuals and photo’s that either represent the loss situation or the gain situation.
  • Finally, pricing (discounts / profits) are also very suitable for loss and gain framing (i.e. ‘don’t miss out on that $5 discount’, instead of ‘get a $5 discount’).

[/checklist]

A/B-test

For Essent.be, Online Dialogue tested the power of loss aversion. Essent.be tries to acquire new customers that currently receive their energy from another provider.

A very important USP for Essent is their price: most people will pay less when switching to Essent than they currently do. Therefore Essent has a prominent calculator on their site where you can compare what you pay with your current provider against what you would pay when you switch to Essent. If you’re cheaper off, the calculator communicates “If you switch now, you save €XX,xx annually”.

Considering that it is more risky to switch from energy provider than it is to stick with your current one, my colleagues at Online Dialogue predicted that a loss-frame would improve their sales. They tested a variation in which people who would save money switching, got the following message: “If you don’t switch now, you will not save €XX,xx annually”.

Although more difficult, the sentence is loss framed, and this improved conversion with 23%…

loss aversion essent abtest

Further reading on loss aversion:

  • Loss Aversion on Wikipedia
  • Kahneman, D. and Tversky, A. (1984). “Choices, Values, and Frames”. American Psychologist 39 (4): 341–350.
  • Tversky, A.; Kahneman, D. (1981). “The Framing of Decisions and the Psychology of Choice”. (link)

  • Sabrina Tom et. al. (2007). “The Neural Basis of Loss Aversion in Decision-Making Under Risk”. (link)

  • Kermer, Driver-Linn, Wilson, & Gilbert (2006). “Loss Aversion Is an Affective Forecasting Error”. (link)

  • Nicolau (2012). “Asymmetric Tourist Response to Price Loss Aversion Segmentation”. Journal of travel research. Vol. 51.2012, 5, p. 568-576.