316. Mastering Loss Aversion: The Key to Driving Customer Behavior and Loyalty (Refreshed Episode)

Welcome to episode 316 of the Brainy Business Understanding the Psychology of why People Buy Today's episode is all about loss Aversion. Ready? Let's get started.

You are listening to the Brainy Business Podcast where we dig into the psychology of why people buy and help you incorporate behavioral economics into your business, making it more brain friendly. Now, here's your host, Melina Palmer.

Hello. Hello everyone. My name is Melina Palmer and I want to welcome you to the Brainy Business Podcast. Today's episode is all about Loss Aversion this episode is a really special one for me because it was the very first Behavioral Economics Foundations episode I ever recorded. This one originally aired way back in August of 2018. Funny enough, this episode is getting its refresh almost exactly five years after it came out. Just a few days off, and it's still just as relevant, probably even more, than it was then. You're going to hear all about loss aversion, what it is, why it matters, and lots of tips for how to apply it into your own business as you listen in. The reason I chose to refresh this episode today is because of this coming Friday's interview with Eden Brownell, Director of Behavioral Science at Impulse Mobile. Our interview was done live at greenbook's iiex North America Conference earlier this year, and our session was called Transforming Healthcare Delivery with Behavioral Science, and one of the concepts they leveraged and saw tons of success with was, you guessed it, loss aversion. There are other concepts in their work, but since loss aversion was such a big piece of how they increased compliance with cancer screenings and more, I wanted.

To share it with you here and.

Refresh this episode again today. As you listen to the episode today, consider places where you're talking about gains, considering the value people get if they do something instead of what they might miss out on if they don't. It can be hard to see just how often we talk about things in Gains because our brains are wired to avoid losses. But when you can narrow in and start to think about how you might talk about avoiding a loss, it's it's amazing how impactful it can be. And don't worry, as you're going to hear all about in the episode, it doesn't have to be negative. I promise. Don't forget there are links for everything, including a free loss aversion worksheet, past episodes, including many that weren't out when this one first aired, since it was only the ninth episode ever on the show over 300 episodes ago, and books and articles. They're all waiting for you in the show notes for this episode, which are found within the app you're listening to and@the brainybusiness.com 316 all right, let's talk.

About loss aversion in my signature talk Consumers are weird. How irrational behavior impacts your business the first concept I bring up is always loss aversion, which is why I felt it was only fitting to start the foundations with this concept as well as I start with loss aversion for two reasons. First, it is a very simple concept to grasp and understand. The examples are everywhere, as I'll point out in a bit. And second, it's one of the truest foundations of behavioral economics itself, with that fateful study by Kahneman and Tversky in 1979 I mentioned in the first episode. Perhaps the study that started it all was built on loss aversion and prospect theory. There is of course a link in the show notes it will probably not surprise you to learn that people hate to lose things. If you've ever had or seen small children playing, you have experienced this firsthand. Take the two Littles we have here in our house. Older Brother is playing contentedly in the playroom, surrounded by far too many toys for one child to play with at any given time. Little Sister wanders up and chooses a toy off the periphery, far outside the immediate reach of Older brother, but for some reason he screams, no, I was just about to play with that. Somehow this random toy, which could be anything from an empty box to a Transformer to a Barbie, has now become his absolute favorite and he cannot bear to give it up. Though none of the other toys are great candidates to hand over to little Sister either, he does not want to lose the opportunity to play with any of them. Whether you have kids or not, you likely know what I'm talking about. We as parents know and talk about how ridiculous it is. And yet. Yet our subconscious brain does this exact same thing all day, every day. We never really unlearn this behavior, we simply know how to control it. Outwardly, your subconscious brain is basically a two year old throwing a tantrum and freaking out when someone else tries to play with your Wonder Woman doll, even if you weren't using it at that exact moment. Sad but true. So what have we done in our businesses and society to sell to this? Unfortunately, we've gotten it completely backwards. We've looked at this behavior and said people like things, we should give them more things. We've created a gain riddled society built on punch cards and reward programs intended to create loyalty, but that more often than not, are gathering dust between the driver's seat and the center console in the car. Gains are not the key to driving behavior. Losses are. And as I will show in the episode, this does not have to be negative. So don't worry. Assuming you aren't driving, Be safe, people. I want you to close your eyes and imagine these two different scenarios I'm going to lay out for you. Really try to put yourself in the moment of each so you can feel what I'm talking about here. They're simple, I promise. Okay, here's the first one. Let's say you got up this morning and started getting ready for the day, realizing it's a little chillier than it has been. So you grab a jacket you haven't worn in a while on your way out the door. When you put it on, you realize there's a $20 bill in the pocket. Amazing. How do you feel? Probably pretty good. This doesn't happen every day, after all. You might tell a couple of people about it. Maybe not. Will you still be bragging about it tomorrow or next week? Will you remember next time you grab this jacket that it was the one with the $20 in the pocket? Or next year when you have the same chilly weather experience? Probably not. All right, on to the second scenario. Imagine you're going to an event very different than what we're used to these days that only takes cash. You do some quick mental math and decide $100 is more than enough for the full day. You'll probably have some cash left over, but it's better to be prepared. So you swing by the ATM on your way and head to the event. When you stop to pay for parking, you reach into your wallet to bring out the bills, only to discover there are only four there. You look in the abyss between the seats, check your wallet again. Are two stuck together?

Maybe? No.

You have lost $20. How does that feel? Pretty terrible, I'm guessing. Will you tell people about this experience? Will you remember it every time you use that parking lot or see advertisements for that event? Or use that atm? Might you even blame the bank or credit union for stealing that $20 from you when it wasn't their fault? Will this become a story you tell your grandkids someday? Maybe it won't get to that extreme, but I'm confident you felt it more than the joy of the found $20. And why shouldn't it feel the same, since it's the same amount of money that is what traditional economics would say. But if traditional economic models were always accurate, behavioral economics would not exist. The studies of Kahneman and Tversky and many others after them have found there is a science to this and have quantified just how much we hate losses compared to the joy we feel from getting new things. The research shows it takes about double the joy felt by a gain to equal the pain felt by a loss. There are links to several articles on loss aversion in the show notes, but as this is pretty easily grasped, let's move on to some practical applications to show how simple it is to switch from gains to losses. I'm guessing you've gotten promotional materials from at least one financial institution in the past, either the one you use or ones that are trying to win your business. In case you're not familiar with the model of a financial institution, they make money when you get loans with them and use their cards. Every time you swipe your card, the financial institutions get what is called interchange income, and so does Visa or MasterCard. And active cards, those which are used a lot, are more profitable for the financial institution because they bring in income without having to charge fees to the card user. This is why you might have seen promotions in the past which say things like, swipe your card 20 times this month and we'll give you $50. It's a very generous offer. When you think about it, $50 is nothing to sneeze at, but many people do not take advantage of things like this. You might have gotten these in the mail and thought, Ooh, $50. I'm definitely going to do that. And then three months later you stumble across the flyer and think, did I? I must have forgotten. Next time I'll take advantage of it for sure. And just like that, it's back out of your brain's processing. But what would happen if they flipped it around if, as a financial institution, you were to instead send out a promotion that said, we have put $50 in your account. If you use your card 20 times this month, you get to keep it. Can you feel the difference? This money would only be in the current balance and not the available balance, so no one would be able to spend the money and incur fees or anything like that. But you would be able to see it in the current balance, and your brain is triggered to want to move it into the available balance. If you're unfamiliar with what I'm talking about, log into your online banking when you get a moment and you'll see these terms when something is put on hold. Say you make a deposit and only some of it's immediately available to you. Or if you use your card at a hotel, the amount in the current and available balances will be different. You can only spend what's in your available balance. So once again I'm recommending flipping the messaging to say we have put $50 in your account. Use your card 20 times this month and you get to keep it. This feels different and makes you want to take action. You start thinking of what you could get with that $50 a pair of shoes or earrings or a nice deposit to your Starbucks card. It doesn't matter what you want with it. Your brain has taken perceived ownership, a concept for another foundational episode and does not want to lose the dream of having that cash. No promotion has 100% success, but I can pretty much guarantee there would be more swipes in the case of the loss driven approach than with the potential of getting some theoretical $50 that might appear sometime in the future. Being able to see see it is a big key in triggering the loss aversion. 2 and like I said, this is not negative for the recipient. They can't overspend and if they miss out they will feel that was their opportunity they didn't take advantage of, not something the financial institution took from them. This is much like a 100% satisfaction guarantee which I talked about in episode six in the way it engages buying behavior. Moving on to the next example. For all the business coaches out there, this is a very popular model for entrepreneurs. So I know there are a lot of you and I know a lot of you are listening. So thank you. People choose to work with a business or executive coach to help them achieve some sort of goal that they cannot get to on their own. This includes a lot of mindset work and this suggestion that I'm about to give you here would also work for a personal trainer or a nutritionist anytime you're trying to get someone to commit to long term gains with regular check ins. So let's say you meet with your client weekly for a check in call. During the call they talk about their intentions for the week, what they will do to reach a future goal, and make some sort of declaration for what will be completed by the next call. How many times have you had the next call only to have them admit that things got in the way and they did not do the thing they committed to doing the week before where the goal they set got bumped down the priority list? How many times have you done this yourself? As a note, this is the foundation of my favorite concept, Hyperbolic time discounting, which I mentioned earlier and can't wait to do an episode on. Okay, the funny thing is that person, your client could have set any goal they wanted. It could have been something achievable. But we love to over commit ourselves and then we end up staying stuck. This is the eating the elephant problem. It looks too big and you dwell and spiral over big pieces for a long time instead of making a lot of tiny steps in the right direction. You're more likely to achieve your goals with this approach. Tiny steps than constantly having goals or items on the to do list that are too big. So let's talk about the conversation with clients when they're setting the intentions and commitments before the next call. If you started each year by saying, I keep a row of jars in my office, one for each of my clients, there's one with your name on it. And as a side note, if you were on a video call, you could show it to them to really help with the perceived ownership. So I keep a row of jars in my office, one for each of my clients. There's one with your name on it. Every week you meet your commitment, I will put $20 in your jar. However, if you ever miss and do not honor your commitment, you lose it all and start over at zero by the end of the year. If you do everything you say you will do, you will absolutely blow this goal out of the water and you will have just over $1,000 as a bonus. And yes, I will give you whatever's in your jar at the end of the year. Does that sound more motivating to you? It sure does to me. As the coach, you can work this into your rates and know it's great for you too. You will want to pay this money back to your clients because it means they achieved so much success with you and will probably give you testimonials. And you could also use this as a deposit to working with you again if they wanted to get repeat clients like the dividend at rei. And just like the financial institution example, they will not blame you if they lose something. And so it's not a negative approach, it's a gift you want to give them to help them keep their commitments. And hopefully it will help them to set realistic and achievable small steps to help them eat the elephant by the end of the year. Alright, our next example is for the accountants and it's something we can all relate to. People are more likely to ask for help on their taxes if they are expecting to owe instead of anticipating a refund. Even though it would be logical to also care about a bigger refund, our brains simply don't work that way. Paying money to potentially get a bigger return does not have the same motivation of paying a little to pay the least amount possible and less in the long run, even if the gain would be much more than the amount saved in the payment. So when messaging around tax time while getting people big refunds is great, it's not as much of a motivator as reducing the amount people people will owe. This could also be used to message around the ultimate fear of tax filing getting audited. If you have not been audited, you expect the worst and your brain builds up this giant fear around what could happen. There would be a big waste of time and money in that process. And you might want to say what's the average cost to someone who has to deal with an audit and how does that compare with the cost of hiring you now Guessing it's a lot less. Perhaps your messaging could be targeted at those who have higher income and say something like as your income increases, so does the likelihood you will be audited by the IRS. Once you cross the $200,000 mark, your chances for audit consistently double and the fees and penalties will be in the thousands. Don't risk it. Let us help you keep your hard earned cash. So you know that statistic was something I found from Money magazine from 2014. So make sure you do your own research. If you go with an approach like this in any business, make sure you do some research for any claims that you make. You might have noticed as well. This does have more of a negative sales approach to it, but it's still with an air of the positive how you can help them to keep more of their hard earned cash. This next example is moving on to furniture sales, interior design and real estate. And really this is a tip that can apply to any physical products. While I am not getting into perceived ownership in this episode, it is really vital when the thing you're selling is a physical product. Anytime you can get someone to visualize themselves using and owning the product, loss aversion and perceived ownership will increase. If you can get them to touch the product, that effect increases greatly. In real estate this would mean walking through the house and this is why things like staging make a difference in selling homes. You can see see yourself living there and the brain starts to take ownership in a way it doesn't with an empty room. It doesn't want to lose out on the new life it's picturing for itself, and this is becoming part of its identity. For interior design and furniture sales or anything with custom orders, you have an issue to overcome. It can be hard to visualize what something will look like when the customer is having to look at a drawing in a book or remember what they have at home. Anytime you can, you want to make the experience as real as possible for them. Let them touch the fabric, and if they're looking at sofas, have them sit on the one closest to what they will actually be getting. Sketch it out, and if you have the ability to do so, get one of those programs that lets you do a 3D rendering. Do you watch HGTV or. Or any other design shows? I'm a fan and I personally love the show Fixer Upper. I'm really bummed there won't be more episodes, but no need to get into that here. If you have seen any design show ever, you know the moments I'm talking about here. But this gets really extreme with Fixer Upper because they're taking people through houses that are just complete garbage piles and trying to convince the owners to trust in their expertise and spend, let's say, $150,000 on a house that's falling apart with dead rats in the living room. Because Chip and Joanna have a reputation now, people trust them. But it likely wasn't easy in the beginning. People on the show will say something like, I don't see it, but I trust in Chip and Joe, so let's do it. They're hesitant and scared until Joanna shows them a virtual walkthrough on her computer. You see their eyes light up. Sometimes they get teary. This is the moment their brain can visualize it. Ownership is claimed. They've bought in. And you better not take this dream house away. They can't bear to lose it. Now find a way to recreate this, this experience in your business to help trigger loss aversion. With any big purchase, people may tend to waffle on the decision because they have the reverse loss aversion, not wanting to give up and lose all that money they've saved up. And there is a fear of regret, another concept that will get its own episode. This is absolutely at play with weddings. Little girls build up the idea of a dream wedding in their mind. And now with shows like say yes to the Dress or other dream wedding makeover shows combined with Pinterest boards of wedding masterpieces without price tags, I might add that most weddings will never live up to it sets a vision. The brain does not want to give up. That is a lot to live up to, and many vendors for weddings feel the brunt of it. You get people who are hesitant to commit and will waste time, not as an attempt to harm you, the shop owner, but because their brain is struggling with the weight of all the decisions it has to make and knowing that once it commits, all the other choices are gone, they can't make those anymore. And that creates a lot of what if questions called reversals, which we'll get in episode two. And there's just a lot of fear that surrounds making a decision like this, something you'll live with for the rest of your life. How do you compete with that? Trigger their loss aversion so they know they got a good deal and can feel positive about the decision to buy from you. I mentioned this on an earlier episode, but when I got my wedding dress last year I had plans to visit more than one shop like most prospective brides have, and I had tried on a dress I really loved. I thought it could be the one, but I wasn't sure and was considering leaving to go try on some others before making the commitment. The shop I was at had a brilliant policy. If you buy on your first visit before you leave the store and no calling on the drive home, you can have 10% off, which can be significant in the world of wedding dresses and an accessory credit to use in the store. Mine was for $200. According to the Knot from 2016, the average bride spends $1,564 on the dress and another $300 on accessories. So the $350 benefit that I got there is a huge item that you don't want to lose out on, especially when you have so many expenses running out the door during wedding planning. Every dollar counts and I'm guessing I'm not the only one who took advantage of the offer. And it helps that the dress was amazing. Okay, to round this out, I want to give an example from online sales which is probably the most ridiculous and over the top thing I have ever seen. For loss aversion, I take screenshots and pictures of things I see all the time for inspiration for future episodes or blog posts. And this is by far one of my favorites because it is so transparently bad and over the top. You have probably noticed in online sales these days you have to click yes or no type options to close out a pop up box. They're pretty annoying actually, but we're used to them these days. A lot of websites have started using some version of loss aversion to try and persuade people to sign up for lists by upping the ante and instead of simply saying do you want to subscribe? Yes or no, they say things like do you want to subscribe yes or yes, sign me up or your other option is no, I don't care about saving money or no, I don't care about donating to whatever cause. You have to actually acknowledge that you don't care about whatever the tip is or whatever you would get. The good ones are subtle, but these can go bad really quickly. The ridiculous one I saw, which is shared on the blog@thebrainybusiness.com to give proof this is real and I'll share it on social media too. My handle pretty much everywhere is at the Brainy Biz B I Z the Brainy Biz and so this was for a fitness dvd, one of those where you only pay shipping and handling and it was trying to upsell other programs. The options were yes, add the total body fat burning DVD series to my order for the one time investment of only $25. And above that they have the old price in red with a big line through it. The price was 97 and then they showed the bonus price in green, which is actually a good practice as well. And again, I'll talk about that in a future episode. So that was the yes. It was a bit of a sell affirmat for them, which is fine, but the no is where the real craziness comes in. So your other option that you had to click was no thanks. I'm not interested in quickly obtaining my dream body. I understand this is my only opportunity to get access to this information and I'm okay with missing out. I understand after declining this offer it may never be available again at any price. Even if I wish to pay more. I will pass on this forever. It just makes me laugh every time. Is that extreme or what? Long? I personally would be interested to see how many people took advantage of the offer, and I would be willing to bet it was too extreme and it actually turned more people off than it converted. A more subtle approach, in my opinion, would be more effective. So the lesson for you is you can overdo it because something like this could flag the conscious brain and get it to say, you know, your subconscious says oh what do we do here? I don't know how to handle this really long paragraph of no. And then you start to use logic and say oh, we don't need that. I bet they would let me buy it if I really wanted. I'll show them something along those lines. And at this point in the purchase process, the person who came across this message hadn't actually completed the first purchase, and this could be enough of a deterrent to make them abandon the whole thing. So as with any of these concepts, just make sure that you don't get too extreme, because it could go in the opposite direction and really turn people off when you start to flag the conscious brain.

So what got your brain buzzing as you learned about loss aversion today? For me, I love having an opportunity to revisit past episodes of the podcast, especially. Especially these, which were so early on in the process, because after doing several hundred of these now, I relearn along with you when I listen back all these years later. And because I've learned new things and tried things and seen things and worked with clients on projects and things since then, I now have new things I'm working on in my own company and with clients, and the information just hits different when I listen back to something at a different time. I really enjoy that process and I hope you do as well and that you learn all sorts of new things, even when you're revisiting something from the past. One big lesson I want to leave you on as we close out this episode is the importance of trying things, even if it feels scary. I debated a lot about whether or not I should even do Foundations episodes way back in 2018. I worried the audience would feel like it was a boring, boring lecture or that they might not like the experience of these because at the time they were very different from what I had already done and what I was seeing on other shows like mine at that time. It's really funny to think back on now that with over 300 episodes to think back to episode nine, when I was planning to try this series, which has become a staple and a lot of what the podcast is known for now. I remember being on a walk with my husband that summer and in 2018 and talking about how this wasn't what my audience was used to hearing from me and worrying that they may leave because this wasn't what they had come to expect. But it was episode nine, for goodness sakes. I mean, that means that I was in the planning phase, like just over a month into the show, five years later. I can tell you I've tried a lot of stuff on the show that I didn't think I would do. Maybe things I said I would never, never do. But things change and it's important for us to be willing to grow and change with them. In business, we don't want to change willy nilly. But when you plan and process and know it's a great move or just.

Something worth trying and testing, it's so.

Important to give things a shot. Even if something you're doing is wildly successful, it doesn't mean that it's the top for you or that something else or a small tweak wouldn't be even better. Another example of this here at the Brainy Business is interviews. I said from the beginning and for well over a year of doing the show that I didn't and wouldn't do interviews. Can you imagine? So not every show needs to do or should do interviews, and I still think it was good to set a foundation of solo episodes for me and the Brainy Business to establish that thought leadership. But today the show is full of so many amazing interviews and guests. I've been able to meet and work with and learn from and connect you to so many amazing people and books and ideas by incorporating interviews into the show. And those have been built into my books and more work and just amazing stuff. And just like the Foundations episodes, I was really scared to do the first one. Even though, you know, I'd been through it with foundations before. It feels different each and every time.

I get it.

I debated about how the audience would react. I worried about how it might change things. I was scared about what I might lose if I made that change. Sound familiar? Hello loss aversion. But I'm so glad I took the leap and many others, and I want to encourage you to do the same. Change can be scary, but that doesn't make it bad. What have you been thinking about doing or trying or starting or stopping doing? Consider how loss aversion and familiarity bias and status quo bias and habits are working into that equation. And consider what could be if you were to let go and just try. I'm linking to some great episodes in the show notes, including my interview with Lydie Klotz on his book Subtract where he says less is not a loss, as well as on related past episodes like Status Quo Bias and Familiarity Bias, which weren't out when this one first aired five years ago. Know that whatever you're going to do, whatever you want to try or change or get rid of, that's taking up valuable space that can free you up to try that next big thing. You can do this. And please do come share it with me on social media. You can find me as the brainy biz pretty much everywhere or email me melinathebrainybusiness.com I can't wait to hear all about it and know that there's going to continue to be change here at the Brainy Business as well. I think that's the sign of a healthy business. You can't stay stagnant and stay successful. I hope things land well, but I know not everything is going to be a winner. If there's ever anything you love or don't, please let me know that as well. Want to know what's resonating with people so we can keep things that you really love and enjoy and I always want to hear from you again. You guys can find me as the Brainy Biz on social media or email Melina atthebrainybusiness.com and of course, don't forget about the Show Notes to get your free Loss Aversion worksheet to check out related past episodes, books and articles and those links to connect with me on social media. It's all waiting for you in the Show Notes atthe brainy business.com 316 and just like that, episode 316 on loss aversion is done. Join me Friday for a brand new episode with Eden Brownell about transforming healthcare compliance with behavioral science. It's going to be a lot of fun. You don't want to miss it. Until then, thanks again for listening and learning with me, and remember to be thoughtful.

Thank you for listening to the Brainy Business podcast. Molina offers virtual strategy sessions, workshops and other services to help businesses be more brain friendly. For more free resources, visit thebrainybusiness.com.