Loss aversion theory (in marketing)

An unusual disease has broken out. You are in charge of picking a program that combats this disease. It’s expected that 600 people will die because of this disease if nothing is to be done about it (this is sounding like a 2002 chain email, but bear with me).

Program A: 200 people will be saved.

Program B: 1/3 probability 600 people will be saved, 2/3 probability no one will be saved.

Which one do you pick?

In Tversky and Kahneman’s experiment, most of the people selected Program A. Better to be sure to save 200 people, right?

Now think about this one.

Program C: 400 people will die.

Program D: 1/3 probability no one will die, 2/3 probability 600 people will die.

In the same experiment, most people opted for Program D. Effectively, the options are exactly the same; it’s just framed as a loss versus a gain. Yet most people reversed their decision and suddenly took more risk to save everyone in program D rather than to be certain to save 200 people in program C. The researcher’s conclusion was: if people are confronted/framed with loss, they will do anything to avoid it – even if it means taking more risk.

While this experiment is an extreme example, it led to a series of experiments that came to the conclusion that people are more afraid to lose something than they are happy to gain something, even if the probability and the magnitude of that loss or gain is of the exact same size. This is what’s called loss aversion theory. Our human brains rather avert certain loss over anything else and we change our behaviour because of that.

There are tons of business examples out there of how loss aversion theory is applied. Like Asana giving you their full product for 30 days by default, and after that it’s downgraded to Asana Lite. Notice how it’s not upgrading (gaining) it’s downgrading (losing).

Beauty brands are talking about preventing wrinkly skin (averting loss). And then… then there’s this loss aversion example…