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.
- [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.
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
Join the BE Thoughtful Revolution – our free behavioral economics community, and keep the conversation going!