In business and life, most of us would agree that winning is better than losing. But is NOT losing better than winning? Is there even a difference?

 

Let’s talk golf. A rational golfer should try just as hard to make a putt for a birdie (1 under par) as he or she would to make that same putt to avoid a bogey (1 over par). In both cases, the penalty for missing is exactly the same – one stroke.

 

But golfers, like all of us, have an unconscious illusion that makes them feel that having a negative experience is worse than missing out on a positive experience, even if the result is the same. So they try harder and perform better when avoiding a bogey than they do when putting for a birdie.

 

Researchers at the University of Pennsylvania studied this irrational behavior and calculated that this type of decision-making bias costs the average professional golfer about one stroke during a 72-hole tournament. For the top 20 golfers, that translates to a combined loss of about $1.2 million in prize money a year.

 

Lest you think I am picking on golfers, the rest of us are just as irrational. Imagine I tell you that I will flip a coin and you can bet on the outcome: if it is tails you lose $100, but if it is heads you win $150. Would you take this bet?

 

You should, because the expected value is positive - the average outcome is $125 - higher than what you started with.

However, studies show that most people would rather avoid the potential loss and not take the bet.

 

Behavioral scientists call this effect loss aversion and it stems from the impulses of your primitive “lizard brain” that are designed to keep you safe by avoiding danger whenever possible.

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It’s gonna cost you
Marketers who understand loss aversion frame their advertising copy around the prospect of what the consumer will lose if they do not purchase their product. Instead of “save $50 per month on gas”, they will say, “Not using our service is costing you $50 every month.” 

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They may also give you a free trial or sample which will be more difficult to give up than it would have been to not use in the first place. (The endowment effect comes into play here as well, which is the phenomenon where we put a higher value on things we own than on things we do not own.)

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Incentivizing by gain or by loss
Understanding the human predisposition for avoiding loss can help business owners, executives and managers promote productivity from their teams.

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A four week study of factory workers in China offered an incentive to two groups of employees for reaching a productivity benchmark. One group was given 80 renminbi (Chinese unit of currency) for each of the four weeks they met the goal. The other group was given 320 renminbi at the beginning and had 80 taken away each week they missed the target. 

 

Both incentives were effective but the second group performed better. The incentive to avoid the loss was greater than the incentive to gain the same amount.

 

Fighting against change
Consider the last time you introduced a major change into your organization’s structure or operations. How difficult was that? Virtually every positive change will be difficult, at least in the short term, for some stakeholders. For example, it may reduce a certain department’s influence, it may reallocate resources, or there may be a steep learning curve for some individuals. Those people who are negatively affected by a change fight harder against it than the potential winners fight for it, similar to the golfer trying harder to avoid a bogey.

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That loud resistance can keep organizations from making change when it is needed for growth, positive performance, and responding to disruption. The resistance is the squeaky wheel and when it is given higher priority over the benefits of the change, your decision performance falters. The status quo wins, but the business loses.

 

We can’t always beat this illusion that losses are more important than gains, but by taking a moment to consider the real costs and benefits, we can take away some of its influence.