THE MATH BEHIND LOSING AND WINNING
Exploring how loss aversion bias can be leveraged in an attention deficit world
BEHAVIOURAL ECONOMICS PRIMER.
In sports, the pleasure of winning is less than the pain of losing.
Winning is great. You get to hoot and holler, hoist the trophy and do the victory lap. But, as most of us who have engaged in sports know, there’s nothing that quite matches the intensity of emotion brought by losing. The joy of triumph is undoubtedly eclipsed by the feeling of despair precipitated by a loss.
Take that iconic photograph of Muhammad Ali standing triumphantly Sonny Liston. Great photo. Now think of Liston. Do the pleasure/pain math.
Although most of us are not professional athletes, there are undoubtedly everyday activities where we might be missing out or making poor decisions because we do not understand how loss aversion works.
WHAT IS LOSS AVERSION?
Loss aversion is the tendency to feel the pain of a loss more than the pleasure of an equal gain. We tend to place more value on what we already have than on what we could potentially gain.
In describing the pain of losing in comparison to the pleasure of gaining, psychologists Daniel Kahneman and Amos Tversky very succinctly pointed out “losses loom larger than gains”. Here, in other words, loss aversion can be observed in how losing a $50 note might often feel more annoying than the satisfaction of finding a $50 note.
This natural asymmetry between the perception of losing and the perception of gaining is very much evident in marketing strategies today. Common examples include free 30-day service trials, limited-time deals, as well as e-shopping cart abandonment notifications.
Brands often endeavour to provide target audiences with a sense of ownership, and then illustrate the potential of them losing this ownership
LOSS AVERSION AND IMPACTFUL COMMUNICATION
—CDC: TERRIE’S TIP : SMOKING AND CANCER—
Centers for Disease Control and Prevention’s (CDC) smoking cessation advertisement also brings to life the concept of loss aversion, albeit in a uniquely different manner. Here, loss aversion was employed not to sell a product nor a service, but instead to sell a message. In the advertisement, Terrie talks about how she gets ready for the day after the effects of treatments for throat cancer caused her to lose her teeth and hair, and to have a laryngectomy.
Terrie’s story was used to provide a loss aversion angle aimed at getting smokers to quit as part of CDC’s cessation programme. The advert sought to reiterate that by smoking, one lends himself to the possibility of having cancer.
By employing Terrie’s struggle with health problems due to smoking, the campaign set forth to make clear the threat that smoking poses to one’s health. Of course, it is much harder to quantify the success of the advertisement in question, but it is apparent that it ultimately sends a hard-hitting message to current smokers, with the intention to ‘convert’ them to ex-smokers.
LOSS AVERSION AND THE FREEMIUM MODEL
“Although certain consumers may not be willing to pay the market price to try a good, they may pay the market price to avoid losing that good.” – Nathan Novemsky and Daniel Kahneman
The freemium model has been especially prominent in the software market. Results have proven that providing users with temporary access to premium functions can quickly and efficiently increase product and brand awareness. Furthermore, the very fact that consumers are using this service means that they would habituate to the premium service, which subsequently results in them exhibiting loss aversion when they are asked for payment at the end of their free trial period.
Spotify very wholly encapsulates this freemium phenomenon. Spotify users coming to the end of their free two-month trial tend not to assess the situation along the lines of price and alternatives, but instead considers how they are able to potentially miss out on all the luxuries of Spotify Premium – ad-free music, instant access, offline mode – that they have been indulging in. Statistics have reported that Spotify’s paid-subscription base currently stands at 15 million subscribers. Juxtaposing this number to Spotify’s overall active base of 60 million users reveals a very cool 25% conversion rate.
SO HOW CAN MARKETER’S USE THIS?
In an attention deficit world, the marketer can use this understanding for designing both strategy and execution for its customers. At idstats, we seek to assist our clients in assessing Why? Where? And How can the tenets of this bias be used for creating superior brand strategy.
So, was Alfred, Lord Tennyson correct when he wrote, “Better to have loved and lost than to have never loved at all?”
I’m willing to bet some who loved, lost and never loved again might beg to differ with him. I’m not advocating avoiding love, but you’d do well to consider deeply who you give your heart to because the potential pain could be worse than the perceived joy.