People hate losing much more than they like to win and like to keep to what they already have. Learn how to use these.

Imagine that you are a sales agent selling home insulation. You can talk to people about the benefits of insulation and that they can save 50 cents a day by insulating their home or you can frame your message in terms of losses and tell them they are losing 50 cents a day every day that their home is not insulated. Which one will be more powerful in motivating people to take action and insulate their homes? We’ll answer that in a moment. But first, let me share some personal stories with you…

I remember when I was taking a corporate finance class as part of my MBA program. The professor said he had a friend who worked at London Stock Exchange. His friend complained to him that on bad days, when the market was in red, he was getting hundreds of calls from worried clients complaining about making losses, but on good days no one was calling him to thank him for making money for them.

Talking about markets, I opened my personal retail investor account and bought my first shares before I had even finished my MBA course. At some point, I read that a common mistake rookies like me make is selling shares where they’ve made profits and keeping hold of those that are in red, hoping that things will turn around and they’ll make a profit on those as well. Now I had read this advice but did I follow it at the time, no. I know I am guilty of this on at least a few occasions. In retrospect, I think one of those instances was when I sold my Amazon shares, for a good 100% profit (doubling my investment) instead of selling some other shares that I was at a loss. I still keep the latter. I just checked and found that had I kept my Amazon shares, I’d be sitting on 10,000% more profit…

Why do we hate losing so much?! Well, the answer to that from an evolutionary psychology perspective probably has to do with the logic that you’re more likely to survive if you end up with lesser gains than you are if you lose until you’re left with nothing at all. Whatever the cause, we just seem hard-wired to hate losing much more than like winning.

Loss aversion is the human tendency to prefer avoiding losses over receiving an equivalent gain. And just like with many of the principles of behavioral science, we owe the knowledge about this bias in our thinking to Amos Tversky and Daniel Kahneman. They performed an experiment asking people if they would accept a bet based on the flip of a coin. If the coin came up tails the person would lose $100, and if it came up heads they would win $200. The results of the experiment showed that on average people needed to gain about twice (1.5x – 2.5x) as much as they were willing to lose in order to proceed forward with the bet (meaning the potential gain must have been at least twice as much as the potential loss).

In another experiment, Kahneman and Tverski told people to imagine they had been given $1,000 and that they now had to choose to either:

• Take a gamble where they have a 50% chance to win $1,000 OR win $500 for sure.

Here, 84% of people chose the certain win of $500.

Then another group of people were told to imagine they had been given $2,000 and asked to choose between:

• Take a gamble with a 50% chance to lose $1,000 OR lose $500 for sure

Here, 69% of people chose to take a gamble.

If you look at this closely, you’ll see that in both cases people have the choice between the same two options – the certainty of being richer by $1,500 or take a gamble to be richer by $1000 or $2000. However, you see that more people chose the certain thing (win $500) when it was framed as a gain (they were risk-averse towards winning an extra $500 to make it $2000) and when the sure thing was framed as a loss (lose $500) more people had an appetite for risk in order to avoid loosing an extra $500.

This demonstrates loss aversion by showing that people are willing to take on risk to avoid a loss, even when they’re not willing to do the same for a gain.

Now, back to the question about home insulation, we started with. By now this shouldn’t come as a surprise to you that by simply reframing the pitch from a gain frame to a loss frame, 150% more people chose to insulate their home.

So how could you use this powerful motivator of human behavior:

• Show people the pain your product or service can help people avoid, or the pain they may find themselves in if they do not purchase it
• Express things in the “negative” or using a loss frame
  • g. Do you make this money mistake? How many dieting mistakes do you make? Will your car fail its annual inspection?
• Use the Fear of Missing Out (FOMO effect) by emphasizing limited quantities and opportunities, deadlines and expiration dates or the ability to preserve options
  • g. Airlines and Hotels show “only 2 rooms / seats left”.
  • g. You can market an event as “previously sold-out” or that the event won’t be repeated
  • g. “Lock in current prices before 2025”
• Use phrases such as “don’t miss” and “free” (offering a free trial means no loss)
  • Spotify for example offers a free trial of Spotify Premium and what happens when the trial is over – people who got used to ads-free music are facing a loss as their music is being interrupted by adds.

A couple of notes of caution:

1. Don’t forget ethics! When using loss aversion, be truthful and respect your audience. Don’t advertise “only two seats left” if there are dozens or hundreds of them.
2. Test it! As with all behavior science principles, there is no guarantee that they will have an effect on people’s behavior in all situations and circumstances besides people are getting used to these types of messages. So remember that these are just extra tools and prompts in your arsenal, so be creative, find new ways to use the principles and test those against control groups and other behavior principle framings and interventions.

The Endowment Effect

Now if you go back to the gamble options example above. You’ll see that in the second case, people already own those 2000 and so they are willing to take more risk to protect what they already own.  So, inspired by Kahneman and Tversky’s work, economist Richard Thaler identified a bias related to loss aversion: the endowment effect. Another explanation about why people are so desperate to avoid losses, according to Thalor is because people attribute an irrationally high value to the things they own, so it hurts more to lose them.  The endowment effect is the tendency of people to attribute greater value to things we own than to things we don’t.

In one experiment, students won from a lottery highly sought-after tickets to a college basketball game. As this was lottery, it also meant that others didn’t win. What was interesting was that when the researchers asked the students who won the lottery, how much they’d sell the ticket for and those that didn’t win, how much are they willing to pay for a ticket – there was a staggering gap. The average selling price was about $2,400, which was about 14 times higher than the average buyer’s offer – about $175.

There had been other similar experiments that show that when people are given something (e.g. a mug), once they own it they value it exponentially more than it’s objective value (what others are prepared to pay for it). The endowment effect is related to loss aversion because people want more money to give up or lose what they already have than they would be willing to pay to acquire that same thing.

So how can you use the endowment principle?

• Frame your message in ways that make customers feel like they already own your product, discount or benefit.
  • g. You’ve just received a gift – free travel insurance
  • g. A flu vaccine has been reserved for you
• Use the IKEA effect – coined after the famous Swedish furniture retailer it means that consumers place a disproportionately high value on products they partially created. Similarly to how we feel towards those cupboards we assembled, making customer to put effort into something, will make them feel more ownership for it. So inviting customers to become creators by customizing designs, configuring components, etc. similarly to how Tesla, Build-a-bear workshop and others do could be a good strategy.
• Invite customers to become creators by customizing designs, configuring components, etc. (Tesla, Buid-a-bear workshop, etc.)
• Offer a free / discounted trial
• Inform people they would be removed form a list unless they reengage
• When presenting options, lead with the most robust first. The rest feel like losing things
• Offer return policy or guarantee (deals with loss aversion, but endowment effect kicks in)

How can we boost vaccination rates using the Endowment principle?

Using the endowment effect proved to be the most effective messaging to “nudge” people to get a flu vaccine. Just before the outbreak of Covid-19, in a study involving more than 47,000 people, researchers tested 19 variations of messages to see which one would have the biggest effect on getting more people to get a flu shot during their scheduled primary-care doctor’s visit.

The most effective message was telling patients 72 hours before their doctor’s visit that it was flu season and that  “a flu vaccine is available for you.” Then, 24 hours before the appointment, people got the message: “a flu vaccine has been reserved for your appointment.”

The proportion of people in the control group who got a flu shot was 42 percent. The “reserved for you” nudge raised that figure by 4.6 percentage points, as reported in the Proceedings of the National Academy of Sciences .

Likewise, in a similar study, conducted involving roughly 700,000 Walmart pharmacy customers, texts reminding patients that a flu vaccine was “waiting for you” lifted vaccination rates more than any other line of messaging did.

One of researcher’s observations was that “the [text] reminder had a greater effect when it was designed to make participants feel ownership of the vaccine dose.” It might be because this language makes patients feel as if the vaccine belongs to them, and they may not want to miss out on “their” dose. However, there may be more than just the endowment effect in action here. Research also shows that people are more likely to accept default options than to choose to opt in to the same course of action. One reason is that defaults are presumed to be the recommended path. Accepting defaults is also perceived to take less effort. After all, you’re just going along with what has already been arranged and accepting a vaccine that’s ready and waiting. (That impression apparently matters, even if it takes little to no effort to simply say yes when a doctor offers you a vaccine after you receive a different text, or no text at all.)

Loss aversion and the endowment principles are just some of the ways you can evoke a stronger emotional response from System 1 and motivate people to take an action. In the next blog we’ll look at other powerful motivators.