Over the long weekend, I read Nudge: Improving Decisions about Health, Wealth and Happiness. Interesting stuff.
Especially good is the first major section, “Humans and Econs”. It illustrates how we (i.e. real people, rather than the fabled “rational person” that’s presumed in traditional economics) don’t always make strictly logical choices. It covers several cognitive biases I’ve previously blogged on, including:
- Anchoring
- System Justification Bias
- Status Quo Bias
- Representativeness (and the Texas Sharpshooter Fallacy)
- Optimism and Overconfidence (The Dunning-Kruger Effect)
Of particular interest – because it ties in with my upcoming webinar – is the section on Loss Aversion (also known as Divestiture Aversion). The authors (Richard Thaler and Cass Sunstein) give some great examples.
First is the brilliantly simple 1991 experiment by Kahneman, Knetsch and Thaler. Half the students in a classroom are given University-branded mugs, and they’re invited to show them to the students who didn’t get one.
Then, both mug owners and non-owners are asked the price at which they’d be willing to buy or sell a mug. This experiment has been replicated countless times, and the results are highly consistent: those who have mugs place a much higher value on them than those who don’t. About double.
And that’s the crux of Loss Aversion: Though acquiring something may give us some pleasure, losing that same thing feels much worse.
We over-value what we already have. Parting with things – incurring a loss – is so difficult, that we get stuck. We’ll refuse to make transactions that would clearly have been in our best interests, just because we don’t want to give something up.
In my webinar on July 28th, I’ll give more examples. And we’ll also cover how you might use this principle in your marketing campaigns.
