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The Principle of Loss Aversion and How to Leverage It in Online Marketing

Updated on June 28, 2014
Scarcity: A Principle of Influence
Scarcity: A Principle of Influence | Source

What Do You Value More?

Avoiding loss of a particular sum of money or gaining that same amount of money? I can guarantee that the majority of you will choose the latter. Those of you who choose the former, though, should give yourself a pat on the back because you are more self-aware than most of us.

Most of you chose the latter option in principle simply because it is logical. Sadly, with emotions in the fray, we humans are rarely ever logical in real world situations. We even created an alien to make us realise this. Such is the way we deceive ourselves.

"Nowhere am I so desperately needed as among a shipload of illogical humans."
"Nowhere am I so desperately needed as among a shipload of illogical humans."

Untangling the Webs We Weave

Luckily, we have been trying to make sense of this general human tendency of trying to keep half a glass of water safe while on an island full of fresh water. It’s known as loss aversion and it’s been proven scientifically.

Great minds have already defined and redefined this psychological concept a million times. Yet, I feel this need to do it too. See the logic in this ‘need’? In any case, here goes nothin’!

The Kahneman Test for Loss Aversion

Loss aversion, as a concept, was discovered by Daniel Kahneman and Amos Tversky. Kahneman is a Nobel Prize winner while Tversky only missed out on it because Nobel Prize is not awarded posthumously. Kahneman came up with the first real loss aversion experiment and still uses it today. His is the example of the coin toss and here’s how it works.

  1. I toss a coin.
  2. Every time ‘Tails’ comes up, you’ll have to give me $100
  3. However, I am asking you how much should I pay you, every time Heads comes up?
  4. In other words, how much money will I have to put on the table to make the bet worth your while?

The vast majority of you will answer in the range of $200. This is Kahneman’s test. It shows that people, in general, are more willing to keep what they have ($100 in this case) rather than gaining something more. In other words, once you acquire something then its value will rise in your head. In the example mentioned above, this means that losing $100 is equal to gaining $200 for most people.

Daniel Kahneman
Daniel Kahneman

A Controversial Author Gets In On The Action!

There are plenty of examples of loss aversion in the world. Consider what Cass Sunstein lists in his book – “Simpler: The Future of Government”.

  1. Professional golfers perform much better, when trying to putt to save par as opposed to trying to putt to get a birdie.
  2. Loss aversion was tested in the teaching profession as well. When it comes to incentivising the teaching profession, promised rewards for better performance have had no effect on teachers’ ability to teach their students. In contrast, when the reward is given before with the addendum that it’ll be taken away if performance is not good then teaching levels have improved drastically.
  3. In the District of Columbia, the authorities tried to reduce the use of grocery bags. Initially, customers who brought renewable bags were promised a bonus of about 5 cents. This had no effect so the official tune changed. People were now told that every time they ask for a grocery bag, they would be charged 5 cents. Grocery bags lost many of their patrons and can now be seen congregating in landfills in the hope of a better future.

Consider the old, tried, and tested ploy of pet store owners as another example of loss aversion in real life. The agenda is to get people to buy dogs or puppies. The trick is to simply give customers a free weekly trial. After you’ve had a puppy sleeping in your arms and nibbling on your fingers, you try braving its innocent eyes and giving it back! I double dare you!

Cass Sunstein
Cass Sunstein | Source

Science Journal’s Experiment on Loss Aversion

In 2006, four brilliant men got together and created an experiment on loss aversion. Their premise was simple too.

They gave each participant $50 and two choices. The first choice was that they can ‘keep’ $30 while the second one was that they can gamble $50 with a 50% chance of winning or losing the whole amount. About 43% of the participants chose to gamble. What does this show you? It shows that 57% of the participants succumbed to the principle of loss aversion. However, the experiment’s second phase will make things even clearer.

In the second phase, with the same setting, the choices were framed differently. The first choice was that the participant will ‘lose’ $20 while the second choice was framed identical to the second choice mentioned in the first phase. This time, 61% of the participants chose the second option – an increase of 18%.

What does this translate to? While keeping $30 of $50 and losing $20 of $50 is the same thing logically, more people chose to avoid the latter option. If this is not a clear proof of loss aversion then you must truly be a glass half full of water and half full of air kind of person.

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How to Translate Loss Aversion into Online Marketing Success

Seasoned online marketers and bloggers already apply the principle of loss aversion without even realising what it is or how it works. They came across practical application of loss aversion through trial and error or by conducting A/B tests.

The objective, as you’ve no doubt already figured out, is to make the website visitor or blog reader think that he would be losing out by not getting your product, availing your service, or even subscribing to your blog. There are essentially two ways through which you can apply the principle of loss aversion for the benefit of your online business. Here are some of these methods.

The Principle of Scarcity and Loss Aversion

Ever heard the phrase “she only wants what she can't have”? It probably originated because someone perceptive figured out a crude version of the scarcity principle. The scarcity principle can be useful for online marketers and bloggers.

The scarcity principle depends on loss aversion and, hence, can be used to leverage it. The scarcity principle, as per Robert Cialdini, a well-known author and professor of psychology and marketing at the Arizona State University, can be used to influence people’s decisions. According to Cialdini, when people realise that something is about to become unavailable, their desire to acquire that thing increases. In simpler words, when something is about to run out, they want it more!

In order to implement the scarcity principle in your online business and to leverage loss aversion, all you need to do is make your audience believe that the stock is limited either in quantity or in time. For instance, you can say that you have only certain units of a product or a particular service is only available for a small period of time. Combine this with early bird discounts at the beginning of the launch and clearance discounts at the end and you have used scarcity and loss aversion three times for the same thing!

Creating the Sense of Ownership in Your Audience

The perfect example of the ownership syndrome is the pet store strategy described above. Because the family gets to keep the puppy for a week or more, they enjoy the feeling of ownership and also feel responsible for it. Consequently, they don’t want to let go of the little fur ball. The ownership syndrome is a direct extension of loss aversion because it’s rooted in not losing something you have.

Loss aversion comes into play when the time comes to let go of what they have. As a result, they’re willing to pay to continue keeping it. If you truly want to use the principle of loss aversion for your blog or website then you’ll have to direct all your efforts at creating this sense of ownership in your audience. Here are some suggestions.

2 for 1 or 1 + 1
2 for 1 or 1 + 1

How Can You Create A Sense Of Ownership In Your Audience?

Creating a sense of ownership to benefit from the inherent principle of loss aversion is an on-going task. It’s not something you can do to boost traffic or conversion for a small period of time. It’s a way of doing business and a way of content management. Here’s how it works.

  1. The first step to creating a sense of ownership is to do it with your content. You need to phrase your language in a way that the reader starts thinking he has a stake in your product, service, or blog. Make them relate to your offering. You can even use words like imagine, suppose, visualise, and picture to create this sense. This brain hack is one of the secrets of marketing, online or offline.
  2. The second method is to use the science of storytelling to get the audience involved. The science of storytelling is very relevant in marketing and can be implemented through written or visual content. To implement the principles of the science of storytelling for marketing, all you need to know to create a sense of ownership is that videos of people using your product are useful. More information on the science of storytelling in marketing will be revealed later through another hub.

The final trick is to simply give away samples of your product or trial periods for your services. If you’re sure about your products and services, then your consumers will not want to let go of them once they already have them. The pet store gimmick is again a prime example here.

The Armstrong Lie

Lance Armstrong: A Real World Example of Loss Aversion Gone Wrong

Lance Armstrong should be the ambassador of loss aversion. He not only demonstrated the principle in a real life setting but he also let the secret slip out long before the big lie actually became public.

“I like to win, but more than anything, I can’t stand this idea of losing. Because to me, losing means death.”

Armstrong said that losing is like death to him and everyone knows how far he went to avoid a loss. Whether you love him or hate him, the point remains – Loss aversion is real, it is very potent, and it’s extremely difficult to understand.


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