Loss Aversion

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What Is Loss Aversion?

Cited From Wikipedia:

From Daniel Kahneman:

In economics and decision theory, loss aversion refers to people's tendency to strongly prefer avoiding losses to acquiring gains. Some studies suggest that losses are twice as powerful, psychologically, as gains.[citation needed] Loss aversion was first demonstrated by Amos Tversky and Daniel Kahneman.

This leads to risk aversion when people evaluate an outcome comprising similar gains and losses; since people prefer avoiding losses to making gains.

Loss aversion may also explain sunk cost effects.

Loss aversion implies that one who loses $100 will lose more satisfaction than another person will gain satisfaction from a $100 windfall. In marketing, the use of trial periods and rebates tries to take advantage of the buyer's tendency to value the good more after he incorporates it in the status quo.

Note that whether a transaction is framed as a loss or as a gain is very important to this calculation: would you rather get a $5 discount, or avoid a $5 surcharge? The same change in price framed differently has a significant effect on consumer behavior. Though traditional economists consider this "endowment effect" and all other effects of loss aversion to be completely irrational, that is why it is so important to the fields of marketing and behavioral finance. The effect of loss aversion in a marketing setting was demonstrated in a study of consumer reaction to price changes to insurance policies.[2] The study found price increases had twice the effect on customer switching, compared to price decreases.

Loss Aversion Causing Revenue Loss In Real World Marketing and Business

Neuromarketing specialist Russell Wright Speaks to the 2012 Netflix' pricing trainwreck

"Hereis another reason why big companies need to hire Neuromarketers. I wish I could have gotten to Reed Hastingsbefore he lost NetFlix 1 billion dollars in revenue with a single digital action. The Netflix Marketing Erroris a simple but dangerous case of what is called Loss Aversion. You cannot initially give customers something of bundled value and then take it away without generating within them feelings of "extreme rage" as discovered in the many experiments on Loss Aversion. Every cogntive neuroscientist knows that Loss Aversion is one of the most dangerous "tripwires" in the neuromatrix. It is suprising that CEO's of billion dollar companies don't have neuroscientists, neuromarketersand decision theoryexperts on staff."

- Russell Wright, enterprise software user interface specialist

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