Because this is a behavioral economics podcast, it is time to build our behavioral economics foundations. This is the first in a series of episodes where I dig deep into one concept at a time. Previous episodes have been about problems and concepts in business. Such as The Top 5 Wording Mistakes Businesses Make and The Truth About Pricing.
Today’s concept is loss aversion. When speaking about behavioral economics loss aversion is usually the first concept I introduce, and it is a great starting point for this podcast. In this episode, I share a cool study of how loss aversion works and then highlight the concept with several examples. These include examples from financial institutions, businesses coaches, interior designers, accountants and more. I also share how these examples can be used in your business.
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- [06:08] Building the foundations of behavioral economics. This series will have a lot of concepts.
- [06:30] There will also be more problem statement episodes mixed in along with a new exciting format that I’m introducing.
- [06:50] Loss aversion. The first concept I bring up is always loss aversion.
- [07:12] This is a very simple concept to grasp and understand.
- [07:22] This is one of the truest foundations of behavioral economics itself.
- [07:50] People hate to lose things.
- [09:10] Our subconscious brain is basically a two-year-old throwing a tantrum.
- [09:45] In business, we have taken this concept and done things backwards. We try to give people all kinds of things.
- [10:04] Humans are more easily driven by avoiding a loss than gaining something.
- [10:52] The difference between how you feel when you find a $20 bill and lose a $20 bill.
- [13:10] The studies of Kahneman and Tversky have found there is a science to this. We hate losses compared to the joy we feel from getting new things.
- [13:21] Research shows it takes about DOUBLE the joy felt by a gain to equal the pain felt by a loss.
- [13:44] Switching from gains to losses.
- [15:23] What if a FINANCIAL INSTITUTION said, “We have put $50 in your account, if you use your card 20 times this month, you get to keep it.”
- [17:02] Being able to see it is a big key when triggering loss aversion.
- [17:43] A BUSINESS COACH example. How to use loss aversion to keep your client motivated to do their tasks and reach their goals.
- [21:30] An ACCOUNTANT example. People are more likely to ask for help if they expect to owe as opposed to ask for help to get more back.
- [22:23] When messaging around tax time focus on reducing what is owed or being audited and the fear of having to pay or get in trouble.
- [23:52] An example for FURNITURE sales, interior DESIGN, REAL ESTATE, or any PHYSICAL PRODUCT. Perceived ownership is vital for physical products.
- [24:34] Getting people to touch the product or walk through a staged home that the buyer could see themselves living in.
- [25:11] Make the experience as real as possible for the buyer. An example using the show Fixer Upper.
- [27:18] Loss aversion, the fear of regret and WEDDING dresses.
- [28:00] How the brain is struggling with the weight of all the decisions it has to make, and knowing once it commits, all the other choices are gone.
- [28:06] What if questions and fear.
- [28:22] Triggering loss aversion, so that they know they got a good deal and will feel positive about buying from you.
- [29:54] An ONLINE SALES example that is the most ridiculous and over the top example of loss aversion that I’ve seen.
- [30:25] Clicking yes or no type options to close out a pop up box. Upping the ante using loss aversion. “No thanks, I’m not interested in quickly obtaining my dream body. I understand…”
- [33:08] A more subtle approach could be more effective. Getting too extreme could go in the opposite direction.
- [00:37:15] Next week, we have the very first on air strategy session. There will also be an awesome giveaway.
Thanks for listening. Don’t forget to subscribe on Apple Podcasts or Android. If you like what you heard, please leave a review on iTunes and share what you liked about the show.
Links and Resources:
- Episode 2 The Top 5 Wording Mistakes Businesses Make
- Episode 5 The Truth About Pricing
- Episode 8 What is Value?
- Episode 3 Do Lead Magnets Work and Do You Need One?
- What Is Loss Aversion?
- What Is Loss Aversion? Losses attract more attention than comparable gains.
- Loss aversion
- Episode 6 How To Sell From The Stage
- These Are the People Who Are Most Likely to Get Audited
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