Do you worry about what you have to lose, or focus on what you could gain?
Most people — as many as two-thirds — are averse to losing. They mitigate what they could lose before they even see the possible gain. They feel the pain of loss more acutely than they feel the pleasure from a gain, even when the value is the same.
For example, the disappointment of losing $100 often outweighs the satisfaction gained from a $100 windfall.
If you overheard your boss saying he wanted to give you a 10 per cent raise, you’d feel pretty good. But, if you heard him telling the HR manager that he wanted to cut your salary by 10 per cent, you’d feel horrible, even furious. Losing makes you feel stupid and taken advantage of.
Since people prefer avoiding losses to making gains, they become cautious, even risk averse. With a decision comes the very real possibility of making the wrong one.
Sticking with the status quo feels much better, even if we know that it’s costing us money or opportunity. As a result, many people work not to win, but to avoid losing.
In explaining what drives him, cyclist Lance Armstrong once said, “I like to win, but more than anything, I can’t stand the idea of losing, because to me, losing means death.” Ironically, however, his hatred of losing ultimately made him lose.
If I gave you two options: take $100 cash in hand, no strings attached; or flip a coin for the chance to win $200, which would you choose? Logically, you should take your chances and flip the coin.
The potential prize is double the value and the $100 isn’t even yours, so you wouldn’t be out of pocket either way. But, given that people hate to lose, they’re willing to leave money on the table to avoid the possibility.
This time, imagine I was going to flip a coin and if it landed on tails, you would lose $1,000. How much would the winnings have to be for you to regard the possibility of losing a risk worth taking?
I regularly ask executives this question and the common answers range from $2,000 to $10,000, with extremes as high as $100,000. For these executives to overcome loss aversion and deem the risk acceptable, the possible winnings would need to be at least double the potential loss — a finding echoed by scientific studies.
Put another way, losses are twice as powerful, psychologically, as gains. In what should be perfectly rational decision-making, emotions take over. And when they do, loss aversion sets in.
The neuroscience author, Jonah Lehrer, ponders: “Over the last century, stocks have outperformed bonds by a surprisingly large margin. Since 1926, the annual return on stocks after inflation has been 6.4 per cent, while the return on Treasury bills has been less than 0.5 per cent.
“Over the long term, stock portfolios always generated higher returns than bond portfolios. In fact, stocks typically earned more than seven times as much as bonds.”
Still, people buy bonds. Why?
They buy bonds because they hate losing money (more than they enjoy making it), and bonds are a safe bet. Loss aversion takes over rational judgement. People’s emotional instincts are well-intended, but misguided.
Is your tendency to actively avoid losses or to seek gains? More importantly, what is your team’s tendency?
More than likely, the leaning will be towards loss aversion. To counter its effect, change your perspective and ask yourself what the rational reaction and logical outcome would be. Then consider the potential impact.
Let’s apply this to the new 100 per cent tax on cigarettes. I’m sure the tobacco industry is in a panic, even fretting that the volume of cigarette sales will halve.
Logically, will the sales halve? No! Loss aversion sets up the wrong conversation.
Instead of a race to the bottom, discuss what will rationally happen. People who smoke will continue to do so. They may reduce the number of cigarettes they light up, but not by 50 per cent.
Make loss aversion work for you. If you don’t, you’ll lose the opportunity.
The writer is a CEO coach and author of “Leadership Dubai Style”. Contact him at tsw@tommyweir.com
