Sway: Loss Aversion

Definition: Loss Aversion is our tendency to go to great lengths to avoid possible losses.

Overview:

In the book, Sway, the Brafman brothers first bring our attention to loss aversion. None of us are strangers to bouts with this form of irrational thinking. Put simply, fear of losses lead us to make decisions that often do not make sense. Furthermore, fear of losses leaves us investing a lot of time and energy in things that are not worthy of our investment.

One example of this has to do with chasing losses. For instance, the person who does not want to sell their declining stock because they want to get back to even, or to some arbitrary goal, before they sell their stock. The book used examples of people in the technology industry that were advised to sell overpriced stocks, and ended up losing most of their money on tech stocks. Not only did they lose a lot when the bubble first burst, but they lost even more as the held on hoping to recover their losses. Gamblers often chase loses as well, believing that they will be able to recoup their loses if they just gamble a little longer. Loss aversion can be a trap.

Max Bazerman illustrates this in his negotiation class, as a Hamilton, Ontario paper describes:

Harvard Business School prof Max Bazerman runs the $20 auction in his negotiations class. The auction has two rules

Bids must be made in $1 increments. And the runner-up must honour her bid while getting nothing in return. Bidding starts fast and furious. Everyone wants to make an easy buck. Most students see where the train's headed and stop bidding at the $12 to $16 mark.

Yet without fail, the two highest bidders lock themselves in. Bidding passes the $20 mark, hitting $50, $100 and the record-setting $204. "Now, neither one wants to be the sucker who paid good money for nothing," explains the Brafmans about otherwise smart students behaving irrationally. "They become committed to the strategy of playing not to lose."

In all the years Bazerman's run his auction, he's never lost a dime (he donates all proceeds to charity). "Regardless of who the bidders have been, they are always swayed. The deeper the hole they dig themselves into, the more they continue to dig."

Application:

In church organizations I have thought a lot about this concept since I was first acquainted with it in the book Good to Great.

So often, churches look back on the way things used to be, and they invest a lot of energy in recreating a past that is impossible to recover. They also invest a lot of money in declining programs and paradigms of what their church should be like.

My last job was a lot like this. Over and over again they tried to hire staff to resurrect programs that were on the decline, yet the congregation as a whole was not invested in doing what needed to happen to make them sucessful.

Another way this shows up in churches is in how we treat and pay attention to certain people. In churches there are always people that are leaving and/or have left, and churches spend an inordinate amount of time striving to get these people to come back when they are already gone. Or grieving their loss. Or being angry at them for leaving. Instead of moving forward in future relationships and with future leadership, they spend even more time trying to get those same people to be reinvested. In some churches, people are pining away for people who have not attended church in 5 or 10 years.