Welcome to The Brainy Business Podcast
Melina Palmer: Welcome to episode nine of the Brainy understanding the psychology of why people buy.
Announcer: You are listening to The Brainy Business podcast where we dig into the psychology of why people buy and help you incorporate behavioral economics into your business, making it more brain friendly. Now here’s your host, Melina Palmer.
Melina Palmer: Hello everyone, my name is Melina Palmer and I want to welcome you to The Brainy Business podcast. This week is the very first foundations episode. Hooray. Up to this point, all the episodes have been dedicated to problems or concepts in your business and questions you might ask yourself, or have asked me, like the top five wording mistakes businesses make, which was a big request, and the truth about pricing and the very popular episode on change management.
By the way, for any of you who are new to the podcast, welcome. Here’s a quick rundown I give at the beginning of every episode. Anything that has you thinking I should look into that or what was the name of that episode will be linked in the show notes so you don’t have to try and remember what I mentioned. You can get to the show notes via the player you’re listening through or by visiting thebrainybusiness.com nine because this is episode nine. I don’t mention this every time because it would get pretty repetitive. I do a lot of research for each episode, so there are a lot of things linked in the show notes for you. They also have a guide of what’s discussed when with timestamps to make it easy for you to go back and relisten to find things.
So after listening to this episode on loss aversion today, if you want to pop back and listen to the mentions of loss aversion in last week’s episode, what is value? You could go to thebrainybusiness.com eight and see that at 14 minutes and 22 seconds. I talk about how herding, perceived value and loss aversion work together in things like bidding wars before. I talk about the most expensive painting ever sold at auction by an American artist and a $200 grilled cheese sandwich. I really enjoyed making that episode. If you couldn’t tell if you haven’t listened to it yet, I recommend it. It’s a lot of fun.
The First Behavioral Economics Foundations Episode
So far in the podcast, this is the only type of episode we’ve done together. I take a business problem like why lead magnets work and if you need one and talk about the best way to approach that problem using varying concepts of behavioral economics, I bring them up as they’re relevant and give a brief definition or example often linked to a study or two. But we don’t get much deeper than that on any of the concepts themselves until now. As I said at the top of the show, this is the first in a series of foundational episodes which dig deep into one concept at a time.
What exactly does that mean? For one thing, don’t worry, it will not be a boring lecture hall experience. Bueller Bueller as with every speaking engagement or podcast episode, I like to make things fun, applicable and down to earth. And you can expect that here as well. So here’s what we’ll be doing and seeing on these episodes. I will use the official name of the concept from the field of behavioral economics in the title and throughout the episode for reference purposes, even the weird ones like hyperbolic time discounting, which is one of my favorite concepts even though it has an absolutely terrible name. But don’t let this scare you off, there will be a lot of value in these episodes because I will then tell you about how the concept works by referencing a really cool study, but summarizing the interesting points like I always do, and not getting into the nitty gritty stuff you don’t need with links to the full study in the show notes for anyone who wants to dig in deeper, then, is the best part. I will give a whole lot of examples of how this has been proven to work and ideas for how you can use this specific example in your business.
Loss Aversion in Business
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Melina Palmer: For example, in this episode on loss aversion, I give examples from financial institutions for business coaches, furniture sales and interior designers, real estate agents, accountants, CPAs, and more. And there’s a bonus, a freebie on the website at the brainybusiness.com nine to help you walk through an example for your own business. Hooray. And if you’re already a subscriber on The Brainy Business email list, you get an email every week with the links to the new episode and any worksheets are right there waiting for you. Easy peasy. If you’re not on that list and you want to be, simply go to thebrainybusiness.com and when you sign up for any of the worksheets, you get added to that. As long as you select that you want to receive emails, as well as if you sign up for my free ebook, the top ten behavioral economics concepts you need to know and how to apply them, you’ll be put on that list as well.
Okay, one last thing. While these foundational episodes are a series of sorts, there are going to be a lot of them, because there are a lot of concepts in behavioral economics. As you know, our brains are very complex. So the series which I said with air quotes, if you couldn’t hear it in my voice, will be broken up with more problem statement episodes mixed in. And another really exciting format I’m bringing into the mix that I will tell you about at the end of the episode. You’ve been asking for this one, and I can’t wait to share it with you, so stick around for that.
The Core Concept of Loss Aversion
How irrational behavior impacts your business. In my signature talk, consumers are weird, but now let’s get into loss aversion. In my signature talk, consumers are weird. How irrational behavior impacts your business. The first concept I bring up is always loss aversion, which is why I felt it was only fitting to start the foundations with this concept as well. I start with loss aversion for two reasons. First, it is a very simple concept to grasp and understand. The examples are everywhere, as I’ll point out in a bit. And second, it’s one of the truest foundations of behavioral economics itself. With that fateful study by Kahneman and Tversky in 1979, I mentioned in the first episode, perhaps the study that started it all was built on loss aversion and prospect theory. There is, of course, a link in the show notes.
It will probably not surprise you to learn that people hate to lose things. If you’ve ever had or seen small children playing, you have experienced this firsthand. Take the two littles we have here in our house. Older brother is playing contentedly in the playroom, surrounded by far too many toys for one child to play with at any given time. Little sister wanders up and chooses a toy off the periphery, far outside the immediate reach of older brother. But for some reason, he screams, no, I was just about to play with that. Somehow, this random toy, which could be anything from an empty box to a transformer to a Barbie, has now become his absolute favorite, and he cannot bear to give it up. Though none of the other toys are great candidates to hand over to little sister either. He does not want to lose the opportunity to play with any of them.
Whether you have kids or not, you likely know what I’m talking about. We as parents, know and talk about how ridiculous it is, and yet our subconscious brain does this exact same thing all day, every day. We never really unlearn this behavior. We simply know how to control it. Outwardly, your subconscious brain is basically a two year old throwing a tantrum and freaking out when someone else tries to play with your Wonder Woman doll, even if you weren’t using it at that exact moment. Sad, but true.
The Problem with Gain-Riddled Society
So what have we done in our businesses and society to sell to this? Unfortunately, we’ve gotten it completely backwards. We’ve looked at this behavior and said, people like things, we should give them more things. We’ve created a gain riddled society built on punch cards and reward programs intended to create loyalty, but that, more often than not, are gathering dust between the driver’s seat and the center console in the car.
The Power of Loss
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Melina Palmer: Gains are not the key to driving behavior. Losses are. And as I will show in the episode, this does not have to be negative. So don’t worry. Assuming you aren’t driving, be safe, people.
Two examples show how easy it is to switch from gains to losses. I want you to close your eyes and imagine these two different scenarios I’m going to lay out for you. Really try to put yourself in the moment of each so you can feel what I’m talking about here. They’re simple, I promise. Okay, here’s the first one. Let’s say you got up this morning and started getting ready for the day, realizing it’s a little chillier than it has been. So you grab a jacket you haven’t worn in a while on your way out the door. When you put it on, you realize there’s a $20 bill in the pocket. Amazing. How do you feel? Probably pretty good. This doesn’t happen every day after all. You might tell a couple of people about it. Maybe not. Will you still be bragging about it tomorrow or next week? Will you remember next time you grab this jacket that it was the one with the $20 in the pocket? Or next year when you have the same chilly weather experience? Probably not.
Alright, on to the second scenario. Imagine you’re going to an event very different than what we’re used to these days that only takes cash. You do some quick mental math and decide $100 is more than enough for the full day. You’ll probably have some cash left over, but it’s better to be prepared. So you swing by the ATM on your way and head to the event. When you stop to pay for parking, you reach into your wallet to bring out the bills, only to discover there are only four there. You look in the abyss between the seats to check your wallet again. Are two stuck together maybe? No. You have lost $20. How does that feel? Pretty terrible, I’m guessing. Will you tell people about this experience? Will you remember it every time you use that parking lot or see advertisements for that event or use that ATM? Might you even blame the bank or credit union for stealing that $20 from you when it wasn’t their fault? Will this become a story you tell your grandkids someday? Maybe it won’t get to that extreme, but I’m confident you felt it more than the joy of the found $20. And why shouldn’t it feel the same since it’s the same amount of money? That is what traditional economics would say. But if traditional economic models were always accurate, behavioral economics would not exist. The studies of Kahneman and Tversky and many others after them have found there is a science to this and have quantified just how much we hate losses compared to the joy we feel from getting new things. The research shows it takes about double the joy felt by a gain to equal the pain felt by a loss. There are links to several articles on loss aversion in the show notes, but as this is pretty easily grasped, let’s move on to some practical applications to show how simple it is to switch from gains to losses.
Applying Loss Aversion to Financial Institutions
Financial institutions use promotional materials to increase their profits. I’m guessing you’ve gotten promotional materials from at least one financial institution in the past, either the one you use or ones that are trying to win your business. In case you’re not familiar with the model of a financial institution, they make money when you get loans with them and use their cards every time you swipe your card. The financial institution gets what is called interchange income, and so does Visa or Mastercard and active cards. Those which are used a lot are more profitable for the financial institution because they bring in income without having to charge fees to the card user.
This is why you might have seen promotions in the past which say things like, swipe your card 20 times this month, then we’ll give you $50. It’s a very generous offer. When you think about it. $50 is nothing to sneeze at. But many people do not take advantage of things like this. You might have gotten these in the mail and thought, ooh, $50. I’m definitely gonna do that. And then three months later you stumble across the flyer and think, did I? I must have forgotten. Next time I’ll take advantage of it for sure. And just like that, it’s back out of your brain’s processing.
The Power of “You Get to Keep It”
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Melina Palmer: But what would happen if they flipped it around? If, as a financial institution, you were to install instead send out a promotion that said, we have put $50 in your account. If you use your card 20 times this month, you get to keep it. Can you feel the difference? This money would only be in the current balance and not the available balance. So no one would be able to spend the money and incur fees or anything like that, but you would be able to see it in the current balance, and your brain is triggered to want to move it into the available balance. If you’re unfamiliar with what I’m talking about, log into your online banking when you get a moment and you’ll see these terms. When something is put on hold, say you make a deposit and only some of it’s immediately available to you, or if you use your card at a hotel, the amount in the current and available balances will be different. You can only spend what’s in your available balance. So once again, I’m recommending flipping the messaging to say, we have put $50 in your account. Use your card 20 times this month and you get to keep it.
This feels different and makes you want to take action. You start thinking of what you could get with that $50. A pair of shoes or earrings, or a nice deposit to your Starbucks card. It doesn’t matter what you want with it. Your brain has taken perceived ownership, a concept for another foundational episode, and does not want to lose the dream of having that cash. No promotion has 100% success, but I can pretty much guarantee there would be more swipes in the case of the loss driven approach than with the potential of getting some theoretical $50 that might appear sometime in the future. Being able to see it is a big key in triggering the loss aversion too. And like I said, this is not negative for the recipient. They can’t overspend, and if they miss out, they will feel that was their opportunity they didn’t take advantage of, not something the financial institution took from them. This is much like a 100% satisfaction guarantee, which I talked about in episode six, in the way it engages buying behavior.
Loss Aversion for Business Coaches and Trainers
Some people choose to work with a business or executive coach to achieve a goal. Moving on to the next example. For all the business coaches out there, this is a very popular model for entrepreneurs. So I know there are a lot of you, and I know a lot of you are listening, so thank you. People choose to work with a business or executive coach to help them achieve some sort of goal that they cannot get to on their own. This includes a lot of mindset work, and this suggestion that I’m about to give you here would also work for a personal trainer or a nutritionist. Anytime you’re trying to get someone to commit to long term gains with regular check ins. So let’s say you meet with your client weekly for a check in call. During the call, they talk about their intentions for the week, what they will do to reach a future goal and make some sort of declaration for what will be completed by the next call. How many times have you had the next call only to have them admit that things got in the way and they did not do the thing they committed to doing the week before where the goal they set got bumped down the priority list? How many times have you done this yourself? As a note, this is the foundation of my favorite concept, hyperbolic time discounting, which I mentioned earlier and can’t wait to do an episode on. Okay, the funny thing is that person, your client, could have set any goal they wanted. It could have been something achievable. But we love to over commit ourselves and then we end up staying stuck. This is the eating the elephant problem. It looks too big and you dwell and spiral over big pieces for a long time. Instead of making a lot of tiny steps in the right direction, you’re more likely to achieve your goals with this approach, tiny steps than constantly having goals or items on the to do list that are too big.
Motivating Clients with a “Jar” System
Set goals for your clients and then reward them if they meet them. So let’s talk about the conversation with clients when they’re setting the intentions and commitments before the next call. If you started each year by saying, I keep a row of jars in my office, one for each of my clients, there’s one with your name on it.
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Melina Palmer: And as a side note, if you were on a video call, you could show it to them to really help with the perceived ownership. So I keep a row of jars in my office, one for each of my clients. There’s one with your name on it. Every week you meet your commitment, I will put $20 in your jar. However, if you ever miss and do not honor your commitment, you lose it all and start over at zero by the end of the year. If you do everything you say you will do, you will absolutely blow this goal out of the water and you will have just over $1,000 as a bonus. And yes, I will give you whatever’s in your jar at the end of the year. Does that sound more motivating to you? It sure does to me. As the coach, you can work this into your rates and know it’s great for you too. You will want to pay this money back to your clients because it means they achieved so much success with you and will probably give you testimonials. And you could also use this as a deposit to working with you again if they wanted to get repeat clients. Clients like the dividend at REI and just like the financial institution example they will not blame you if they lose something. And so it’s not a negative approach. It’s a gift you want to give them to help them keep their commitments. And hopefully it will help them to set realistic and achievable small steps to help them eat the elephant by the end of the year.
Loss Aversion for Accountants
People are more likely to ask for help on taxes if they are expecting debt. Alright, our next example is for the accountants, and it’s something we can all relate to. People are more likely to ask for help on their taxes if they are expecting to owe instead of anticipating a refund. Even though it would be logical to also care about a bigger refund, our brains simply don’t work that way. Paying money to potentially get a bigger return does not have the same motivation of paying a little to pay the least amount possible and less in the long run, even if the gain would be much more than the amount saved in the payment. So when messaging around tax time while getting people big refunds is great, it’s not as much of a motivator as reducing the amount people will owe.
This could also be used to message around the ultimate fear of tax filing getting audited if you have not been audited, you expect the worst and your brain builds up this giant fear around what could happen. There would be a big waste of time and money in that process, and you might want to say, what’s the average cost to someone who has to deal with an audit? And how does that compare with the cost of hiring you now? Guessing it’s a lot less? Perhaps your messaging could be targeted at those who have higher income and say something like as your income increases, so does the likelihood you will be audited by the IRS. Once you cross the $200,000 mark, your chances for audit consistently double and the fees and penalties will be in the thousands. Don’t risk it. Let us help you keep your hard earned cash. So you know that statistic was something I found from Money Magazine from 2014. So make sure you do your own research. If you go with an approach like this in any business, make sure you do some research for any claims that you make. You might have noticed as well this does have more of a negative sales approach to it, but it’s still with an error of the positive how you can help them to keep more of their hard earned cash.
Visualizing Products to Engage Loss Aversion
If you can get customers to visualize themselves using a product, loss aversion decreases. This next example is moving on to furniture sales, interior design, and real estate. And really, this is a tip that can apply to any physical products. While I am not getting into perceived ownership in this episode, it is really vital when the thing you’re selling is a physical product anytime you can get someone to visualize themselves using and owning the product, loss aversion and perceived ownership will increase. If you can get them to touch the product, that effect increases greatly.
In real estate, this would mean walking through the house. And this is why things like staging make a difference in selling homes. You can see yourself living there, and the brain starts to take ownership in a way it doesn’t with an empty room. It doesn’t want to lose out on the new life it’s picturing for itself, and this is becoming part of its identity. For interior design and furniture sales, or anything with custom orders, you have an issue to overcome. It can be hard to visualize what something will look like when the customer is having to look at a drawing
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Melina Palmer: in a book or remember what they have at home. Anytime you can, you want to make the experience as real as possible for them. Let them touch the fabric, and if they’re looking at sofas, have them sit on the one closest to what they will actually be getting. Sketch it out. And if you have the ability to do so, get one of those programs that lets you do a 3D rendering. Do you watch HGTV or any other design shows? I’m a fan and I personally love the show Fixer Upper. I’m really bummed there won’t be more episodes, but no need to get into that here. If you have seen any design show ever, you know the moments I’m talking about here. But this gets really extreme with Fixer Upper because they’re taking people through houses that are just complete garbage piles and trying to convince the owners to trust in their expertise and spend, let’s say, $150,000 on a house that’s falling apart with dead rats in the living room. Because Chip and Joanna have a reputation now, people trust them, but it likely wasn’t easy in the beginning. People on the show will say something like, I don’t see it, but I trust in Chip and Jo. So let’s do it. They’re hesitant and scared until Joanna shows them a virtual walkthrough on her computer. You see their eyes light up. Sometimes they get teary. This is the moment their brain can visualize it. Ownership is claimed. They’ve bought in, and you better not take this dream house away. They can’t bear to lose it.
Now find a way to recreate this experience in your business to help trigger loss aversion with any big purchase. People may tend to waffle on the decision because they have the reverse loss aversion. Not wanting to give up and lose all that money they’ve saved up and there is a fear of regret. Another concept that will get its own episode. This is absolutely at play with weddings. Little girls build up the idea of a dream wedding in their mind. And now with shows like Say Yes to the Dress or other dream wedding makeover shows combined with Pinterest boards of wedding masterpieces without price tags, I might add that most weddings will never live up to it sets a vision the brain does not want to give up. That is a lot to live up to. And many vendors for weddings feel the brunt of it. You get people who are hesitant to commit and will waste time, not as an attempt to harm you, the shop owner, but because their brain is struggling with the weight of all the decisions it has to make, and knowing that once it commits, all the other choices are gone. They can’t make those anymore. And that creates a lot of what if questions called reversals, which we’ll get in episode two. And there’s just a lot of fear that surrounds making a decision like this. Something you’ll live with for the rest of your life. How do you compete with that? Trigger their loss aversion so they know they got a good deal and can feel positive about the decision to buy from you.
Incentivizing Immediate Purchase
If you buy on first visit, you get 10% off your wedding dress. I mentioned this on an earlier episode, but when I got my wedding dress last year, I had plans to visit more than one shop like most prospective brides have, and I had tried on a dress I really loved. I thought it could be the one, but I wasn’t sure and was considering leaving to go try on some others before making the commitment. The shop I was at had a brilliant policy. If you buy on your first visit before you leave the store, and no calling on the drive home, you can have 10% off, which can be significant in the world of wedding dresses and an accessory credit to use in the store. Mine was for $200. According to The Knot, from 2016, the average bride spends $1,564 on the dress and another $300 on accessories. So the $350 benefit that I got there is a huge item that you don’t want to lose out on, especially when you have so many expenses running out the door during wedding planning, every dollar counts, and I’m guessing I’m not the only one who took advantage of the offer. And it helps that the dress was amazing.
The Perils of Extreme Loss Aversion Messaging
Some websites use loss aversion to try and persuade people to sign up for lists. Okay, to round this out, I want to give an example from online sales, which is probably the most ridiculous and over the
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Melina Palmer: top thing I have ever seen. For loss aversion. I take screenshots and pictures of things I see all the time for inspiration for future episodes or blog posts. And this is by far one of my favorites because it is so transparently bad and over the top. You have probably noticed in online sales these days you have to click yes or no type options to close out a pop up box. Pretty annoying actually, but, we’re used to them these days.
A lot of websites have started using some version of loss aversion to try and persuade people to sign up for lists by upping the ante. And instead of simply saying, do you want to subscribe, yes or no, they say things like, do you want to subscribe, yes or yes, sign me up. Or your other option is no, I don’t care about saving money, or no, I don’t care about donating to whatever cause. You have to actually acknowledge that you don’t care about whatever the tip is or whatever you would get. The good ones are subtle, but these can go bad really quickly. The ridiculous one I saw, which is shared on the blog at the brainybusiness.com to give proof this is real. And I’ll share it on social media, too. My handle pretty much everywhere is at The Brainy Biz, the brainy biz. And so this was for a fitness DVD, one of those where you only pay shipping and handling, and it was trying to upsell, other programs. The options were, yes, add, the total body fat Burning DVD series to my order for the one time investment of only $25. And above that, they have the old price in red with a big line through it. The price was 97. And then they showed the bonus price in green, which is actually a, good practice as well. And again, I’ll talk about that in a future episode. So that was the yes, it was a bit of a sell. Affirmative. Meant for them, which is fine, but the no is where the real craziness comes in. So your other option that you had to click was, no thanks. I’m not interested in quickly obtaining my dream body. I understand this is my only opportunity to get access to this information and, I’m okay with missing out. I understand after declining this offer, it may never be available again at any price. Even if I wish to pay more, I will pass on this forever. It just makes me laugh every time.
Is that extreme or what? And long. I, personally would be interested to see how many people took advantage of the offer. And I would be willing to bet it was too extreme and it actually turned more people off than it converted. A more subtle approach in my opinion would be more effective. So the lesson for you is you can overdo it because something like this could flag the conscious brain and get it to say, you know, your subconscious says, oh, what do we do here? I don’t know how to handle this really long paragraph of no. And then you start to use logic and say, oh, we don’t need that. I bet they would let me buy it if I really wanted. I’ll show them something along those lines. And at this point in the purchase process, the person who came across this message hadn’t actually completed the first purchase, and this could be enough of a deterrent to make them abandon the whole thing. So, as with any of these concepts, just make sure that you don’t get too extreme because it could go in the opposite direction and really turn people off when you start to flag the conscious brain.
Wrapping Up and What’s Next
The Behavioral Economics Foundation’s loss aversion is in the books. All right, there you have it. Behavioral Economics Foundation’s loss aversion is in the books. I hope you liked the description and found the studies to be interesting. And even even more, I hope you found the practical applications for business coaches, accountants, financial institutions, wedding dress shops, real estate agents, and more to be useful and help you to see ways you can incorporate this into your business. If you do find a way to do that, please share it with me on social media. Like I said, The Brainy Biz everywhere and there are so many ways to implement this. I have created a free worksheet to help you come up with your plan. It is available at the brainybusiness.com nine. So go download your copy and start factoring loss aversion into your messaging without having to be negative when you start working through this.
If you want my insights to make sure you’re applying loss aversion properly and not going over to the extreme like the fitness DVD or maybe being too subtle.
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Melina Palmer: I would love to help you. You can simply visit thebrainybusiness.com and click on work with me to schedule a free consult where I can determine the best approach for what you have completed so far to help get you to the point that you would be ready to go. And so, you know, wherever you are, that could be anything from I just don’t know where to start to. I have this finished piece, can you review it and let me know if I’m missing anything? And if you prefer, you can also email me melina@thebrainybusiness.com if you would rather chat that way. I’m flexible.
Show Your Support
If you liked this episode and are finding value in the podcast, leave a review. If you liked this episode and are finding value in the podcast, would you be willing to rate or leave a review? The Brainy Business already has five stars. Yay. Thank you to the 13 of you who have left ratings. It only takes a second and you can do it right from the app you’re listening in. This helps other people to find the podcast and decide if it’s one they want to listen to. And a special thank you to the eight of you who have taken the time to leave a review. It means so much to me and I love to read them. And again, it helps people to relate and decide if this is something they want to listen to. To history goes bump. who said I’ve been learning so much from this podcast? Give it a listen. Thank you. I’m glad you’re finding value and Debbie K. Page, who said, if you are a small business owner or are involved in marketing your company’s products and services, you can’t afford to miss a single episode. Thank you. And Debbie has also been kind enough to share on the Facebook page and interact on Instagram and she is an all around awesome person. I actually know her so love her and appreciate you taking the time to comment, my friend. Thank you so much. If any of you listening to this episode choose to rate or leave a review, thank you so much in advance. It means more to me than I can say.
Looking Ahead to Episode 10
This week is episode ten of The Brainy Business podcast. All right, that wraps up this first foundations episode on loss aversion. I hope you enjoyed it as much as I did. This week is episode ten. Can you believe it? And in honor of that milestone, I am going to give you something you have been asking for since before the podcast even launched an on air strategy session. This episode will include an actual call with a listener and client asking for advice for her business and me helping to work through with tips from behavioral economics giving her lots of ideas to work on. It is so good and I can’t wait for you to hear it. You’re going to love it, so don’t miss out. Plus, I feel like there will be a pretty sweet giveaway to commemorate the 10th episode. Do you think I should shout out to me on social media again? I’m The Brainy Biz. That’s B I Z on Twitter, Facebook and Instagram, so let me know if you want a bonus or not on episode ten. Until then, thanks again for listening and learning with me, and remember to be thoughtful.
Announcer: Thank you for listening to The Brainy Business podcast. Melina offers virtual strategy sessions, workshops, and other services to help businesses be more brain friendly. For more free resources, visit thebrainybusiness.com.
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