Loss Aversion Causes Risk Averse Behavior
Loss Aversion refers to the behavioral principle that when
measuring the risk of loss vs. the opportunity for gain, where both are
possible, "losses loom larger than gains".[1]
In other words, people are risk averse when
making a decision that involves both possible gains and losses. Therefore
whether it may be an investor weighting investment opportunities, start-ups
weighting their need for patent strategy, or politicians calculating their
political moves, their decision will be influenced more by the prospect of loss
than the prospect of gain when both factors are equally present.
Loss Aversion - Why You Should Care: Persuasive Messaging
If you can frame your messages to appeal to loss aversion they
can be more persuasive. In other words, loss framing will usually have a
stronger persuasive effect on behavior than gain framing[2].
Zion Credit Card Case Study
In this experiment, credit card
customers who had not used their card in the previous 3 months were randomly
selected and assigned to gain framing or loss framing conditions.[3]
Depending on which group they were in, the customer received either a message through
telephone or mail that was gain framed or one that was loss framed.[4]
Examples of the messages and the framing received can be seen in the tables below.
Loss Framed: Disadvantage of Checks
|
Gain Framed: Advantage in Using ZionCard
|
“In using checks you can only lose in comparison to
using ZionCard!!”
|
“In Using
ZionCard you can only gain in comparison to using checks!!”
|
“Using Checks does not provide you with protection
against theft or loss!!”
|
“Using ZionCard does provide you with protection
against theft or loss!!!”
|
Loss Framed:
Disadvantages in Cash
|
Gain Framed: Advantages
in Using ZionCard
|
No Free credit for up to one month.
|
Free credit for up to one month.
|
No continuous tracking of your expenses.
|
Continue tracking of your expenses.
|
Inconvenience in daily use.
|
Convenience in daily use. [5]
|
Thereafter, the customers that
were in the loss framed group had twice the amount of utilization (card use)
and total amount of dollars charged on their credit card than those in the gain
framed group[6].
Conclusion
Therefore, the results are clear.
In regards to credit card usage, loss framing has a much stronger effect[7].
Case studies are necessary in other domains, but the results are likely to
translate. Perhaps Patent Consultant Firms framing their messaging in regards
to the defensive need for patents, as opposed the income they can derive, is
prudent marketing[8].
Like this post? For more on loss aversion see Loss Aversion Keeps you From Higher Stock Returns.
[1] Daniel
Kahneman, Thinking Fast and Slow, 415.
[2]
Yaov Ganzach and Nili Karsahi, Message Framing and Buying Behavior: A Field Experiment, 15. (For examples on when Loss
framing is less persuasive stay tuned for my next installment on the topic of
Loss Aversion).
[3]
See Ganzach, supra note 2,
at 12. In relevant part: “Two hundred
forty-six credit card owners, who live in the country's three largest cities,
were randomly selected from all customers who did not use their cards in the
three months preceding the study. They were randomly assigned to either gain framing
or loss-framing conditions.”
[4] Id.
[5] Id. at 13-14.
[6] Id. at 15.
[7] Id.
[8]
See Kalu Kalu, The Patent Portfolio Theory: How Aggregation and Synergy Increase
Patent Portfolio Valuation. http://www.cleantechpatentedge.com/2012/04/the-patent-portfolio-theory-how-aggregation-and-synergy-increases-patent-portfolio-valuation/
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