Loss Aversion

By Chris Chittenden

“The most important thing in life is not simply to capitalize on your gains. Any fool can do that. The important thing is to profit from your losses. That requires intelligence, and makes the difference between a man of sense and a fool.”

… Dale Carnegie (1888 - 1955) US educator and writer

Loss aversion refers to the tendency for people to strongly prefer avoiding losses rather than acquiring gains and some studies suggest that psychologically losses are twice as powerful as gains. Originally demonstrated by Amos Tversky and Daniel Kahneman in the late 1970’s, the idea of loss aversion has been further explored by behavioural economist Dan Ariely in his book, “Predictably Irrational: The Hidden Forces That Shape Our Decisions”. In his book, Ariely gives many examples of research where many people will not take advantage of a significant material or financial gain if it means giving something up.

What does this mean in terms of modern organisations? Well, organisations are constantly adapting to fluctuating circumstances by changing their organisational structures and processes. Most organisational changes are accompanied by a good deal of personal and group angst and varying degrees of resistance to the change. The benefits to the organisation and individuals may seem obvious yet the initiatives are still met with resistance. Loss aversion helps us make sense of this.

For most people, change means giving something up to do something new. Giving the theories of loss aversion, the personal benefits have to be significantly greater than the perceived loss if someone is to embrace change whether at a personal or organisational level. This situation is compounded by the fact that most change processes are usually initiated in a context of little or no information about the change. The norm seems to be that change is rumoured before being confirmed. Given such situations, most people have the chance to think about what they might lose well before considering what might be gained. No wonder people generally do no embrace organisational change!

The same also applies to individuals. Many people look on self-development as a change process. They have to stop doing something and start doing something else. With loss aversion in mind, it can be useful to frame change in a different way and potentially improve the chances for development. One way this can be done is to refer to self-development as a growth process rather than a change process. This speaks to the idea that human beings can transcend our way of being and include a new way of being rather than having to let go of part of who we are. This has proved a worthwhile idea for a number of our clients who have struggled in the past with the idea of personal change yet readily adapted to a new frame of reference.

Next time you are involved in influencing change processes, we invite you to look at how you might present a new way of doing things by using language that does not readily speak to loss.

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© 2008 Chris Chittenden