Leveraging Loss Aversion
How our fear of losing what we have can be both a powerful motivator and a vulnerability in business negotiations.
tl;dr. Loss aversion—valuing what we own more than what we don't yet have—can be used as a valuable change management tool, but it can also be used against you in negotiations.
Those of us with an obsession for studying cognitive biases tend to see them as negative influences on our decision making, with our knowledge of them hopefully empowering us to negate them.
My favourite study of loss aversion flips the script and demonstrates the power of harnessing this cognitive bias that states we value the things we have more than the things we don’t have.
As detailed in the New England Journal of Medicine, the study comprised a randomized trial with a variety of programs to incentivize people to stop smoking. A ‘reward’ program paid out $800 to participants who sustained nicotine abstinence after 6 months, and a ‘deposit’ program took a $150 deposit from the participants with it being returned along with $650 reward to those nicotine free after 6 months.
About 17% of the reward group picked up the $800 reward, but despite the smaller cash pay out, more than 52% of the deposit group’s participants successfully quit.
This technique is called a price pact. It leverages the cost of loss to propel us in ways that more valuable rewards don’t. And it doesn’t have to be financial — some authors have accountability partners to whom they make promises to hit productivity milestones, with the loss of their reputation for getting shit done being the impetus to deliver.
There’s another example of loss aversion that may well have been used against you without you knowing.
It’s common for creative services organizations to invest significantly in pitching for new business. When the process goes well you have multiple meetings with the people hiring you, and you’ve succeeded in agreeing on what you’re going to do for this exciting new customer. Along the way your team have had late nights crushing it, and the hours of senior people spent in meetings alone underscore your relief that you’ve beaten out your peers that were competing for the work.
All that’s left is one last task of getting the customer’s procurement person to sign off on everything.
The thing is, your new procurement friend is a trained negotiator, and you likely are not. They explain that budgets are tight this year and that although they understand how much the company wants to work with you, they need to get your fee down by 20%. (It’s always 20%).
If you’ve experienced this, and caved to come down by the 10% to 15% they are actually aiming for, or worse, the full 20%, then you’ve been a victim of loss aversion. Procurement understands you feel that you’ve crossed the finish line already, and use that against you.
So be strong, understand that you’ve not won the job until you have approval to proceed, and offer increased value rather than financial discounts.