“We experience the pain associated with a loss much more vividly than we do the joy of experiencing a gain.” -Ori and Ram Brafman Sway
Daniel Kahneman, Amos Tversky, and Dan Ariely, amongst many others, have discussed the idea of what is referred to as loss aversion, which Wikipedia defines as…
In economics and decision theory, loss aversion refers to people’s tendency to strongly prefer avoiding losses to acquiring gains. Most studies suggest that losses are twice as powerful, psychologically, as gains.
Which can ultimately lead to the making of irrational decisions, especially when we find ourselves caught up in what is often called “chasing a loss.” Think of the gambler, blinded by loss, who continues to place (often irrationally) bet after bet in the hopes of recouping their losses, often taking them deeper and deeper down this hole they’ve created. Or as Ori and Rom Brafman share in Sway, “to make up for a loss…become oblivious to the risks being taken.”
But it is when loss aversion meets commitment that things get really interesting (or really irrational). Or as the Brafman Brother’s share, “Independently, each of these two forces – commitment and aversion to loss – has a powerful effect on us. But when the two forces combine, it becomes that much harder to break free and do something different.”
It is this combination, that keeps us devoted to an idea, a strategy, a way of operating that is no longer working. But much like the gambler “chasing a loss” we find ourselves unable to pull away from the path that we’ve committed ourselves, too. The Brafman’s share, “Our natural tendency to avoid the pain of loss is most likely to distort our thinking when we place too much importance on short-term goals.” For which they add, “The deeper the hole they dig themselves into, the more they continue to dig.”
Awareness of the combination of loss aversion and commitment is vital to today’s leaders and organizations. Too often we stay committed to strategies, processes and initiatives that are just not working. However, instead of a willingness to cut our losses in favor of long-term success, we keep “chasing the loss” in hopes of recouping the time and effort that we’ve put into the path that we’ve chosen to take…often taking us deeper and deeper down a hole that we continue to dig and dig.
To avoid current losses, we actually continue to make more and more irrational decisions that lead to bigger and bigger losses. For which Kahneman and Tversky add, when considering the idea of cutting our losses, we tend to find, “that option is deeply unattractive” for which they say leads to the line of thinking, “the option of hanging on will therefore be relatively attractive, even if the chances of success are small and the cost of delaying failure is high.”
If we are not careful as leaders and organizations of the decisions and commitments that we are ultimately making for ourselves and those we lead…
We can quickly find ourselves not only committed to loss aversion, but ultimately to irrelevance.
“When things go wrong, we can either apply a short-term, Band-Aid solution or remember that in the grand scheme of things, it’s only a minor misstep. Having a long-term plan – and not casting it aside – is the key to dealing with our fear of loss.” -Ori and Rom Brafman Sway
Quotes and references from…
Brafman, Ori and Rom. Sway: The Irresistible Pull of Irrational Behavior. 2008. Broadway Books. New York.