Loss Aversion: The Hidden Killer of Progress

A couple weeks ago I wrote about the idea that in order to maximize commitment and performance on the part of volunteers, it is necessary to give up some control over their activities. I ended with, “Terrifying, isn’t it?” Social science tells us with great certainty that the more a person thinks they are being controlled, the worse they perform. This is known as “the hidden cost of control.” But, as a manager of any sort, we want the reins. The idea of giving up control creates a lot of discomfort for nonprofit executives who are accountable to their boards of directors for results. Ceding control is a new strategy for most, and even though we have solid evidence that doing so will increase performance of volunteers, most managers don’t cede control to volunteers. Why is that? There are a few reasons:

  • No one’s job was ever saved by, “The volunteers didn’t do what they said they would.”

  • It is counter intuitive that ceding control will improve volunteer performance.

  • Another freaky human bias? Yes!

Ceding control is a change and requires a decision. Why should this—or any—change be such a gut-roiling exercise when all the research, both quantitative and empirical, says, "do it"? Most often, people stay the course in the face of diminishing results. Each of us has sat back in our chair, exasperated and confused about a leader or subordinate’s unwillingness to change in the face of overwhelming evidence. In fact, my friend Amy Braiterman of Blackbaud, recently confided in me her frustration because sometimes clients go against all reason and make clearly self-destructive decisions. “Katrina, what is happening in their heads as they point a gun at their own foot? I just don’t get it,” she said.

Clearly, I needed more information. And, it’s 10 p.m. on the night before deadline. To the well I go, yelling from the home office. “Honey, what do you psychologist types call it when you have a person that has all the facts in front of them to make a good decision, but goes the other way instead?”

He yelled back, “Watching TV right now.”

I shouted, “There’s a lager in it for ya.”

He replied, “Likely it’s ‘loss aversion,’ and I want a frosty glass too.”

Me, “I’m going need two paragraphs and a reference for a frosty glass.” Negotiation completed, here’s what we have from Otis Fulton, Turnkey’s shanghaied psychologist:

Psychology tells us that people are hard-wired to avoid losses. Indeed, loss aversion has an evolutionary history, going back to our prehistoric days as hunter/gatherers. It boils down to this–people who treated threats as more urgent than opportunities had a better chance to survive. In staff meetings and conference rooms we experience this emotionally—the fear of loss is stronger than the prospect of gains. That is what loss aversion means. (KV: In the wild, avoiding a lion today makes you more likely to pass on your genetic material than getting an antelope for dinner today. This tendency manifesting in the wilds of the conference room looks like your boss saying, “Yes, it does look like a good idea, but we don’t know what we don’t know. Let’s pilot this for a year and see what happens.”)

Princeton psychologists Daniel Kahneman and Amos Tversky won the 2002 Nobel Prize in economics for their work on how people make irrational, but predictable, judgments about these kinds of decisions. It turns out that you can measure your own loss aversion pretty simply. Ask yourself, what is the smallest gain that you would need to balance an equal chance to lose $100? For most people the answer is around $200—twice as much as the loss. Kahneman and Tversky’s research showed that the “loss aversion ratio” was in the range of 1.5 to 2.5, depending on the individual—some people are much more loss averse than others.

None of the above makes me particularly proud or hopeful for the human race. It sounds darned near impossible for the average human to make a decent decision. Even if the method or product you are changing to is twice as good as what are doing now, you are only just on the cusp of making that good decision. That is a high bar. And yet, we do ultimately change.

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What do you think about the theory of "loss aversion", do you see this in your organization? We'd love to hear feedback on the blog and poll results.