How Loss Aversion Can Inspire Your Success

Are you having problems getting motivated? Not meeting your goals? Struggling to get that habit started?

How would you enjoy getting familiar with loss aversion? A strategy that can help you achieve your habits and goals.

Loss aversion is thought to be twice as powerful as a positive rewards system. The fear that you have something and might lose it will get you motivated.

How to Create a Mindset That Gets Results

The first time I applied the loss aversion strategy to my own life was when I attended college. I was not the greatest college student. I just wanted the little sheet of paper that said I graduated college. I was not unwilling to study for hours, I just did not have the mindset and motivation to seek a 4.0 grade point average. In one of my classes the instructor was giving their opening remarks on the first day of class. She stated, “Today, everyone in this class has an A. It depends on you to keep that A. I deduct points from your maximum allowable score.”. She then turned towards the board and wrote 1000. Then with subtraction, she showed the class how quickly you could drop a letter grade in the next couple of weeks. That was the first class in college I got an A in. The fear of losing something concerned me even more than earning it.

As children we remember playing a game with a parent or a friend. Winning was always fun, but what happened when you lost? Do you recall asking your opponent, “How about the best of 3?”. Then another loss would bring about the best of 5 and eventually the best of 7.

Both these examples are due to loss aversion when losing something is twice as powerful psychologically as gaining something.

If anything, you know, I think losing makes me even more motivated. -Serena Williams

Why Loss Aversion Beats Any Rewards System

Positive rewards are common among those who have a desire to build a habit. You use positive rewards in creating good behavior in your children and your pets. The reward can be in the form of money, candy, or treats. You probably give yourself a reward when you accomplish a goal. Some go on a vacation when they become debt free, others permit themselves to have a treat at the end of the week for accomplishing nutrition or exercise goals. So, what do you do if that is not working?

Loss aversion has been around for many years. It is a financial concept that is being applied to the productivity. Amos Tversky and Daniel Kahneman demonstrated how loss aversion works and were credited with its concept. Kahneman won a Nobel Prize award in economics for the work with Tversky on loss aversion. Put simply, it is the fear of losing something you already have. Loss aversion can be a powerful form of motivation. You probably do not like losing or failing, but worse than that, losing something you already have. Look at your own life. Do you make decisions that favor caution or risk with the opportunity to lose more?

Here’s an example on how this works. You have a goal to get up every morning at 5 am and settle on a consequence that every morning when you do not get up on time, you will donate a dollar to your favorite charity. You don’t have to stick to just money, but you can be creative. Maybe, you donate your time or a favorite possession. This can be applied to your business. Employees are guaranteed a bonus at the end of the year if they meet certain goals. If they do not, they lose the bonus or it gets reduced. The toughest part is not choosing the consequence, but rather being held responsible for the goal. You must find someone that can hold you to your commitment if you fail. To apply this concept to your life is easy. All you need to do is reverse the rewards strategy and turn it into a loss startegy.

3 Simple Steps to Achieve More Motivation!

To create a loss aversion strategy:

Set a goal.
Choose a consequence if you fail.
Ask someone to hold you accountable.

Erik Tyler says

February 28, 2015 at 2:19 pm

I’d like to add a little to these thoughts, with the hope that I won’t be perceived as controversial simply for the sake of controversy.

I think a key to the success of loss aversion is that it be applied to yourself BY yourself. I get a little wary where loss aversion is applied by one person to another. First, let me give a couple of caveats based on your post, Kirby.

In the case of the teacher starting every student with an A, the teacher really doesn’t deduct the points (or at least not arbitrarily) — the student does. It is a natural consequence that if one doesn’t turn in an assignment, THEY THEMSELVES have made the choice to cause themselves a loss of points. The teacher does not just “take them away.” In fact, in this very example, you’ve mentioned that the teacher added, “… it’s up to you to keep [your A].” She did not cause loss to any student’s grade; she merely alerted each student that they had choices to make, some of which would result in a loss they themselves created by failing to submit 100% of their work in good order.

Regarding the suggestion that employers offer a year-end bonus and then deduct from it for less than satisfactory performance, we start to move away from the teacher/student example and get into what I’d consider potentially marshy ground. In a classroom, there is typically a syllabus showing what is due when; and rubrics are handed out enumerating what will constitute an A, a B, and so forth. In an employment situation, withholding a bonus could quite easily become a form of manipulation, wherein the decision-maker can use the “loss aversion” threat of bonus reduction to elicit non-standard behavior from employees (e.g., “I need you to switch shifts with Joe this weekend; keep that year-end bonus in mind …”).

I feel that if such a loss aversion technique were instituted in a work setting, the guidelines for how to “keep the bonus,” as well as a clear list of what would cause one to lose it, should be provided in advance to all employees. Then, like in the classroom, the power over the loss aversion lies with the employee himself, not with someone else.

This gets even murkier in personal relationships. Couples can then justify saying (or simply implementing) things like, “If you don’t do what I want you to do, I’m not going to talk to you for the rest of the day.” Parents can say to their teens, “If you don’t help me clean the yard, then I’m not letting you go out this weekend.”

In short, in order for loss aversion to be effective, it really shouldn’t be a form of manipulation wielded by one person over another. It should only ever be something that an individual chooses to impose on himself as a means of motivation. Otherwise, I’d say we should refrain from calling it “loss aversion” and call it what it is — merely a form of control or punishment.

Comments

Adam Smith says

February 28, 2015 at 7:36 am

Great post,Kirby! It’s so true.

Erik Tyler says

February 28, 2015 at 2:19 pm

I’d like to add a little to these thoughts, with the hope that I won’t be perceived as controversial simply for the sake of controversy.

I think a key to the success of loss aversion is that it be applied to yourself BY yourself. I get a little wary where loss aversion is applied by one person to another. First, let me give a couple of caveats based on your post, Kirby.

In the case of the teacher starting every student with an A, the teacher really doesn’t deduct the points (or at least not arbitrarily) — the student does. It is a natural consequence that if one doesn’t turn in an assignment, THEY THEMSELVES have made the choice to cause themselves a loss of points. The teacher does not just “take them away.” In fact, in this very example, you’ve mentioned that the teacher added, “… it’s up to you to keep [your A].” She did not cause loss to any student’s grade; she merely alerted each student that they had choices to make, some of which would result in a loss they themselves created by failing to submit 100% of their work in good order.

Regarding the suggestion that employers offer a year-end bonus and then deduct from it for less than satisfactory performance, we start to move away from the teacher/student example and get into what I’d consider potentially marshy ground. In a classroom, there is typically a syllabus showing what is due when; and rubrics are handed out enumerating what will constitute an A, a B, and so forth. In an employment situation, withholding a bonus could quite easily become a form of manipulation, wherein the decision-maker can use the “loss aversion” threat of bonus reduction to elicit non-standard behavior from employees (e.g., “I need you to switch shifts with Joe this weekend; keep that year-end bonus in mind …”).

I feel that if such a loss aversion technique were instituted in a work setting, the guidelines for how to “keep the bonus,” as well as a clear list of what would cause one to lose it, should be provided in advance to all employees. Then, like in the classroom, the power over the loss aversion lies with the employee himself, not with someone else.

This gets even murkier in personal relationships. Couples can then justify saying (or simply implementing) things like, “If you don’t do what I want you to do, I’m not going to talk to you for the rest of the day.” Parents can say to their teens, “If you don’t help me clean the yard, then I’m not letting you go out this weekend.”

In short, in order for loss aversion to be effective, it really shouldn’t be a form of manipulation wielded by one person over another. It should only ever be something that an individual chooses to impose on himself as a means of motivation. Otherwise, I’d say we should refrain from calling it “loss aversion” and call it what it is — merely a form of control or punishment.