How Loss Aversion Dominates Your Life

Cognitive Bias 14 out of 25: Deprival Super-Reaction Tendency

Humans are constantly having cognitive biases affect the way decisions are made. These biases cause people’s brains to distort reality, impair judgment, and cause impulse decisions. The deprival super-reaction tendency is one of my favorites because of the absolute stranglehold it has on our lives. Psychologically, humans can’t stand being deprived of things and will over react in ways to avoid the pain of deprivation. This phenomenon is better known as loss aversion.

Loss aversion relates to how humans would rather avoid a loss than receive any sort of gain. That’s why fear is such a powerful emotion.

This cognitive bias becomes more powerful the bigger your investment is. What’s crazy is it doesn’t only relate to financial investments. Loss aversion comes into play with emotions, time, life, safety, resources, and the number one thing that causes the most pain when you lose it… BEER.

Loss Aversion and Business

“Don't miss the forest for the trees.”

Loss aversion comes into play with business in a couple different ways. It’s most commonly used to get customers to make impulse buys or to decrease the time it takes to make decisions. We’ve all seen the power of loss aversion when it comes to sale promotions ending, inventory running out (scarcity), and to avoid negative feelings. As a customer, you want to avoid the pain from missing out and you’ll act in the moment to avoid that pain. Like missing out on a sale. Hence the impulse buy.

It’s imperative to utilize these various strategies to initiate decision making. Loss aversion is an extremely effective tool in increasing revenue and business growth. Neglecting to use them is holding back the potential for any business.

There’s also a concept called the sunk cost fallacy that comes into play with business. That’s where you’ll keep doing things like you have been instead of adapting or pivoting. This happens out of fear of change. It also happens in the hopes of a big win even though you might be getting killed on a certain decision. Bears fans know this all too well with Jay Cutler.

Some companies, business owners, managers, etc. will stick to their original decision so much so until the only option left is bankruptcy or going out of business.

Various companies like Blockbuster, Toys R Us, and Kodak are commonly known for this. These companies all refused to adapt to a society that was rapidly changing. A lack of open mindedness was occurring and a mindset of “we’ve always done things this way” was setting in. They thought that their technology, styles, and trends would never go away and it ultimately lead to their demise. May they rest in peace...

Refusing to see the big picture and the vision will cause many companies and people to allow loss aversion to dictate their future. After all, you can’t see the forest if you’re focusing on the trees.

Apple is probably the most successful company to combat this cognitive bias. Apple is known for creating the iPhone and the iPad. Both of these inventions were essential for their continued success and capitalization on the market. The invented both of those knowing full well that it would completely cannibalize Macbook and iPod sales.

While this cannibalized technologies that were already becoming obsolete, these decisions helped Apple become the first ever trillion dollar company. It makes me wonder where they would be at if they had the “we’ve always done things this way” mindset...

How Loss Aversion Prolonged the Civil War

The fear of loss is much more powerful than the idea of gaining. So much so that it even prolonged the Civil War almost 3 more years. And I don’t mean this Civil War…

No, no. I’m taking this one all the way back to the actual Civil War with a little story about General George McClellan.

General McClellan was in command of the Union army during the Civil War. During the Battle of Antietam, which is known as the bloodiest day in American History, McClellan had Robert E. Lee and the confederate army in full retreat. The confederate army was reduced by a quarter and retreated to the point where they were backed against the Potomac River. With nowhere else to retreat, President Lincoln ordered McClellan to aggressively pursue Lee and his army and to end the war once and for all.

Lincoln’s orders fell on deaf ears because McClellan wanted to avoid losing anymore lives. He refused the orders even though he was recently reinforced with thousands of union troops. This reinforcement grew the union army to a point that outnumbered the confederate army 3 to 1. Lincoln and all of McClellan’s advisers urged him to attack. Even after all the pleas, McClellan allowed the confederate army to escape.

This fear of loss was so powerful that it paralyzed McClellan’s rational thinking. He thought the confederate army was bigger than it was and feared losing lives in the process. It prolonged the Civil War almost three more years, caused thousands of more extra lives to be lost, and cost McClellan his job when he immediately got demoted by Lincoln. This story solidifies the fact that humans fear loss more than the satisfaction and reward they can get from gaining.

In all fairness, I’m not sure how I would react after just witnessing the bloodiest day in American history. I’m sure it would paralyze most people psychologically and have them shaking in fear.

4 Ways to Combat this Cognitive Bias

There are some simple ways to allow yourself to combat the stranglehold that loss aversion has on our lives. I recommend incorporating these into your decision making process:

1. Don’t think savings. When there’s a $1,000 item on sale for 30% off, you didn’t save 30%. You still spent $700. Thinking differently can get you to understand value. If you think about it, all prices are made up. Some companies set their prices way higher to be able to discount more. It’s called high/low pricing. Watch out for it.
2. Stopping thinking in terms of scarcity. Ultimately, there will be more sales, clothes, food, promotions, etc. The quicker you get yourself out of this mindset, the quicker you’ll have more control over your decision making abilities. I used to be notorious for this when it came to food. Instead of wasting something I would overeat to ensure nothing went to waste. I started to understand that it was alright to waste if I adapted the amount I purchase in the future. My changed thinking on this helped reduce my food bills a little over 30%. Not only that but I’ve lost 25 lbs this year alone!
3. Learn to move on. One of the best things to learn to do is knowing when to walk away from a decision. I talk about this much more in depth in my post on How Being Over Optimistic Kills Business. Failure is apart of everyday life. Learn from those mistakes and come back stronger than ever.
4. Think big picture. Keep in mind that gaining can be just as powerful as avoiding a loss. Too many people play defense especially when it comes to finances. Most successful people attribute playing offense to their financial success.

It’s time to start taking control of your decision making abilities and it starts by conquering loss aversion. Not only that but if you’re in business, start utilizing loss aversion more to increase your revenue. There’s no better way to inspire people to take action!

If you liked this post, check out some of my best work with the 5 Life Changing Lessons I Learned from Business or my most recent post with 7 Strategies to Perfectly Apply Pressure.

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Be great,

Cody Cameron