Loss AversionOpen Access

Loss Aversion

We feel more negative when losing something than positive when we gain it

From selling bad investments to letting go of what we own, our avoidance of loss impacts our decisions and attitude to risk.

Fryer et al. (2012). Enhancing the efficacy of teacher incentives through loss aversion: a field experiment. NBER Working Paper No. 18237.

The study

Setup

150 teachers  in Chicago were either offered a cash incentive up front or after their students’ math test, with better results leading to more money. Subject to results, the money-up-front group would suffer deductions for unmet targets to create a feeling of loss aversion.

Results

Teachers receiving  money up front were found to have much better results than those rewarded at the end.

Study graph

Key Takeaways

Increase conversion with trial offers. Though some consumers might not be willing to pay the market price for your product, they may pay the market price to avoid it being taken away.

Takeaway image

Offer delayed payments to shift consumers’ judgements from paying to get the product to paying to avoid losing it. For instance, a month delay in paying subscription fees. This means that any extra budgetary cost is then re-estimated as a question of how it can be fitted into an existing budget.

Takeaway image

Replace faulty products immediately with an identical or superior model (Novemsky & Kahneman, 2005). Doing it quickly will limit the pain of loss aversion, which builds over time (Strahilevitz and Loewenstein, 1998).

Takeaway image
Takeaway image
Loss Aversion

Loss Aversion

We feel more negative when losing something than positive when we gain it

From selling bad investments to letting go of what we own, our avoidance of loss impacts our decisions and attitude to risk.

The study

Setup

150 teachers  in Chicago were either offered a cash incentive up front or after their students’ math test, with better results leading to more money. Subject to results, the money-up-front group would suffer deductions for unmet targets to create a feeling of loss aversion.

Results

Teachers receiving  money up front were found to have much better results than those rewarded at the end.

study graph
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