Wednesday, January 11, 2017
Loss Aversion and Change
Could you live on 20 percent less income? What about 80 percent of your income?
“Loss Aversion” is the term that the early developers of behavioral economics used to explain why when you ask people “could you live on 20 percent less income?,” most would say no, but if you asked them “could you live on 80 percent of your income?,” most would say yes. On the face of it, that looks like either irrationality or innumeracy, since they’re just different ways of saying the same thing. But phrasing in a way that emphasizes loss gets a different answer than phrasing in a way that emphasizes what’s still there. It’s the same reason that someone who paid two dollars for a coffee mug will demand five to give it up.
Behavioral economics is about looking for patterns in the ways that people act that run counter to what the model of a “rational economic actor” would suggest. It’s the effort to explain why “No Payments for 90 days!” works wonders, even though interest rates are vanishingly low and you still have to pay full price anyway.
When I lived in Massachusetts, the sales tax was 6.25 percent. Once a year, usually in August, the state would declare a “tax-free weekend,” during which sales taxes were suspended on most things. (It didn’t apply to vehicles.) I remember a quote in the local paper from a store owner who marveled that if he had a “10% off” sale, nobody would show up, but 6.25% off brought people beating down the doors. “Tax free” made it sound like you were getting away with something, and “free” is a magic word. Mathematically, that’s silly; ten percent off is a better deal. But it worked.
The same idea holds in politics, in a different form. If you phrase a poll question about abortion around “convenience,” you get one response; if you phrase it around “the government,” you get a very different one, even if the policy implications of the two are identical.
I’ve been thinking about loss aversion in the context of efforts to lead change on campus.
If you start from the perspective that says “if we do what we always do, we’ll get the results we always get,” and you aren’t satisfied with those results, then the presumption in favor of trying something new is strong. But if you start from the perspective that says “this took a long time to develop, it’s mine, and the new thing could be worse,” then the burden of proof on the new thing is much higher. The second perspective more or less dismisses the dissatisfaction with the status quo and the prospect of improvement, instead focusing on the loss of what is currently there. It wants five dollars for the two dollar coffee mug.
Neither perspective is the whole truth, of course; seemingly good ideas can crash and burn, but the status quo is also a choice. Choosing to keep what you have is, in fact, choosing. It may not feel like it, but it is. If all changes were optional, I’d still have a full head of hair. Choosing to ignore the changing world is, in effect, choosing slow decline.
But moving people from “you’re taking my stuff!” to “let’s give it a try” isn’t easy, especially when they’re organized into groups -- departments, say -- in which people tend to echo and amplify each other’s fears. That’s especially true if there’s a relatively recent example of something new that wasn’t an immediately obvious success. If you’re caught up in an echo chamber of loss aversion anyway, then some glitch in a new program can serve to confirm your opposition to pretty much anything. This is where curmudgeons come from.
So far, the best approaches I’ve seen require a careful blend of frankness and patience. The frankness involves calling those fears out into the open and addressing them head-on. That serves to interrupt the echo chamber, and to help people get some rational distance on what may be irrational fears. It can also enhance credibility if you admit that something prior didn’t work out ideally. Nobody’s perfect; just own it. The patience comes in not expecting minds to change all at once, or entirely. Sometimes the most you can get is to move someone, over time, from “opposed” to “neutral.” That’s usually enough, assuming some others are on board.
Over the years, some of my more painful mistakes have come from underestimating the power of loss aversion. I had the math on my side -- ten percent off really is better than 6.25 percent off -- but I trusted that to speak for itself. It doesn’t. Anticipating when that will matter is tricky, and allaying fears works best when you know, going in, that the fears exist. Some people will prefer keeping the old mug, even if it doesn’t fit in the new cupholder. The trick is in anticipating that.