Loss aversion

Driving decisions by understanding risk

How do brains feel about risky decisions?

Brains are drawn instinctively to a certain kind of risk to reward ratio. When it comes to decisions where the outcome is uncertain, there's a particular way our brains deal with the prospect of loss. To demonstrate this, here's an experiment for you to try out yourself:

You are offered a gamble on the toss of a coin.
If the coin shows tails, you lose $100.
If the coin shows heads, you win $150.
Would you take the gamble?

Most people wouldn't. Why? As Daniel Kahneman says in Thinking, Fast and Slow:

For most people, the fear of losing $100 is more intense than the hope of gaining $150. We concluded from many such observations that "losses loom larger than gains" and that people are loss averse.

Daniel Kahneman, Thinking Fast & Slow

Designing around loss aversion

We're fearful more than we are hopeful - so what?

It means that people are more likely to make decisions which deliver in a small loss with no risk, than a decision which results in a greater gain with a large risk. This principle is known as Prospect theory. Here's how Prospect theory can help you design persuasive decisions:

1. Certainty

We would rather have a certain lesser gain than a risky larger gain. That means that it's more appealing to your audience to offer smaller rewards - like a 10% discount - than a chance to win a larger reward - like a holiday raffle.

2. Isolation effect

We tend to ignore similar elements in choices, in order to make the decision process simpler. That means that the one differentiating feature will stand out to us. Consider this when presenting choices to your audience - they will find decisions easier when choices are presented alongside each other, with the main differentiator highlighted.

3. Negative experiences

Since we react stronger to loss than to gains, we are more likely to remember negative experiences we have than positive ones. This is one of the greatest challenges facing companies, since a range of positive experiences are easily overshadowed by one negative experience.