MINDWORX

ACADEMY

Behavioral Economics
& Psychology in Marketing

Loss Aversion
 Loss Aversion

Loss Aversion
Let’s say you went on a first date and it was nothing short of
awesome. You really want to see your date again, so you won’t
make any vague promises of “we’ll-be-in-touch”. And because
you’re smart and you know a lot about the magic of commitment
and consistency (it's actually a part of our next course), you know
it's better to make a plan than leave it up to chance.

Your date mentioned earlier that they liked the movie,

Interstellar, but alas, it's Matthew McConaughey they dig, not
space itself. So you casually hit them with an idea:

“How about we go to the planetarium?”

What a great idea, you think to yourself, that’s so romantic.

Oh dear, they think; “Sounds great!”, they say.

So it’s settled for Wednesday at 7 PM. Content with the result, you
give yourself a virtual pat on the back. With no rainy skies in sight,
you start imagining what it's gonna be like. By Monday, you had
maybe already picked your outfit, thought of where to go for
dinner after the show, and even came up with a backup plan if it’s
too cloudy for stargazing.

On Wednesday at 6:05 PM, your phone chimes with a message:

“I’m sorry I don’t think I can make it. You’re sweet and all, but my
shrink is telling me to own up to things, so well, you should know
I’ve only said yes because I felt bad. And now I feel even worse.:/
Sorry. Don’t hate me.:(“

You pause to let it all sink in; you feel terrible. You were happy
when they said yes, no doubt, but this feels at least twice as bad.

Now that you think about it, it’s hard to believe you actually put so
much effort into planning the whole thing. To think that you even
went to the length of finding what time the special monthly Belt
of Venus show starts and had booked good seats! How could
someone treat you like this? What a moron!

Why did it hit you so hard? A couple of things at play here.

 Loss Aversion

First, not only you lose the person, but also the idea of the date
you have envisioned in your head.

Second, even though nobody robbed you of anything, you were

forced to let go of the plan you had put a lot of thought and
effort into and valued it all the more as a result.

Would you feel better, if we told you it is just loss aversion, the
endowment effect and the IKEA effect acting up?

Losing sucks, and we do everything we can to avoid it. Your

customers do too, even when it’s about things they don't have
yet.

Disenchanting to experience, but enchanting to use, that's loss

aversion in a nutshell. Don't miss out on it and read on.
 Loss Aversion

Table of contents

Definition 6

Creating urgency 7

Reference point 10

Case studies 11

The IKEA effect 17

The Endowment effect 22

Case studies 29

Key takeaways 31

Ideation prompts 33

Additional readings 34

References 35

MINDWORX
ACADEMY
 Loss Aversion

Definition
Well, you’ve been heartbroken already, and now you’re about to
lose some money.

Imagine your friend asks you to flip a coin. If you lose, you pay
them 50 bucks.

How much would have to be given, in case you win, to even

consider playing that game with them? Probably much more
than fifty, at least twice as much, or perhaps even more.

Why isn't the chance of losing and gaining the same amount
equally appealing?

“ We are more afraid of loss than we are attracted

to gain.

Loss aversion in a nutshell.

The fear can make us act on impulses we’d normally ignore.

It's a cornerstone of Prospect theory developed by Daniel

Kahneman, mentioned in the chapter on Perceived effort, and
Amos Tversky.

Their research shows that we’re roughly 2.5 times more sensitive
to loss than we are to gain, which is your answer to why you felt
so poorly after your date bailed on you).⁷

The public were so blown-away with their findings that the

theory won The Nobel Prize in Economics in 2002.

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 Loss Aversion

Creating urgency
Closely related to loss aversion is scarcity and the urgency it
creates. Scarcity tells us that the value of something is higher,
just because it’s scarce. If we don't act now, we might lose big
time.

An antidote to marital problems

There’s a sketch on Saturday Night Live featuring Angel, Every
Boxer's Girlfriend from Every Movie About Boxing Ever. She’s a
recurring character in the "Weekend Update" segment.

Angel is exasperated with her life, and you would be too having to
take care of someone with an omnipresent concussion. She’s
constantly at the verge of a nervous breakdown. She also
repeatedly threatens to take the kids to her sister’s unless
Tommy, with whom life isn't what it was cracked up to be initially,
does or does not do what she says.

The threat which is repeated in each segment has become a

laughingstock. But laugh all you want, Angel might be right on
the money. Sometimes a good scare of what you might lose is all
it takes.

Fun fact:

It works even when we know what's going on.

You know the story of car repairing and uncertainty (if not go back to
Uncertainty). What you don't know is how the car was obtained.

Our colleague had a test drive at a dealership, but was forced to go to another
one to see it in a different color, she was also considering, which was at the
time out of stock at the first dealership. Yet after seeing it, she decided on the
original color.

With a sense of commitment and reciprocity at play she was determined to go

back and close the deal at the first dealership. But car salesmen are known to
be ruthless, so they took it up a notch.

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 Loss Aversion

She was being talked into sitting down to consider possible payments. It
progressed quickly. She said she wanted to think it through and close the deal
at the first dealership who gave her a test drive.

The employee called up his supervisor and presented her with a special “take-
it-or-leave-it” offer of a free set of winter tires, valued at around $400. Of course,
the offer was only valid if she decided to close the deal before the day was out.
Such blatant manipulation made our colleague cringe.

Now what do you think happened? Never mind the reciprocity, never mind
commitment, loss aversion had the upper hand.

Example: Conversion magic maker

Could a little urgency help in the online world as well? It turns out
it can, a lot. Look at the first example, variation A.

As you can see in variation B, the price has remained unchanged.

But the combination of a simple countdown and information on
how many packages have already been bought increased its
conversion by almost 300%.

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 Loss Aversion

When the company moved from testing variation B and

gradually rolled it out to all users, the conversion rate went from
3.5% to 10%.¹²

Even more efficient, might we add, is to create a sense of urgency

via the amount of product left in stock, rather than time.

Example: 1-800-Flowers
Well we all know that honey catches more flies than vinegar, but
did you know that honey also reduces shopping cart
abandonment?

At least that's what 1-800-Flowers figured when they decided to

reward their customers for taking prompt action. The flower
delivery service came up with a push notification system to bring
potential customers back to the app to finish a purchase.

By targeting app users who were close to making, but had not yet
made a purchase with trigger-based push notifications with
promo codes. These compelled them to take action now. Via this
clever reward- pressing system the company was able to increase
abandoned shopping cart conversions by 350%.⁹

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 Loss Aversion

Reference point
Imagine you owned a yoga studio and wanted to motivate more
people to pay in cash. As an incentive, you would charge a
different price per class depending on whether a customer paid
with cash or by credit card. But what’s even more crucial is to
decide what is framed as the original price, what is a discount
and what might even be considered a surcharge.

You can frame it as a discount for cash or a surcharge for credit.

If the cash price is framed as a discount, the credit-card price
becomes the default (anchor if you will), against which your
customer compares the cash price.

On the other hand, if the credit-card price is a surcharge, the cash

price becomes the anchor.

Because we are so averse to loss, it is more palatable for us to

think of the credit-card price as the normal price and the cash
price as the discount price. If your customer pays in cash, they
experience this as a gain, because they’ve saved money. However,
if they perceive the cash price as the normal price, they
experience paying with a credit card as a loss, because of the
additional cost.

So there you have it. Now you know the latter catches more flies
and brings more cash (be careful though about Fairness).¹⁰

“ What customers consider as the price reference

point determines whether a price difference will
be perceived as a gain or a loss.

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 Loss Aversion

Case studies
Home energy use
Psychologists like digging, and we know a thing or two about
that, as the majority of our team consists of them, so no wonder
psychologists went to investigate whether framing something as
a loss would pack a more persuasive punch when it comes to
changing behavior. More specifically to the kind of behavior
which leads to energy reduction.

The study was conducted on homeowners who, unaware of the

research goal, were provided with a free energy audit. It was
apparently a good deal, as all of the weather stripping and
insulation in each of the houses was checked.

Here comes the catch. To conclude the audit, half of the

homeowners were told:

“If you will insulate your home fully, you’ll be able to save 50 cents
a day, every day.”

The other half were told: “If you fail to insulate your home fully,
you’ll lose 50 cents a day.”

Do you find the second statement more compelling?

You aren’t alone. A hundred and fifty percent more people

chose to insulate their home under loss language rather than
gain language. Not bad for a simple change of a single verb
which draws attention to the losses a person incurs because of an
existing situation. And thus in this situation, losing money is
much more compelling than saving money.⁴

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 Loss Aversion

Useful tip:

You can use it in negotiations and presentations for potential clients.

Compare these two messages as a punch line to your proposition:

“You could get hundreds of new clients by learning how to use some of the
most powerful behavioral principles.”

“Right now you might be losing hundreds of clients because you don’t take
into consideration what’s going on in their minds.”

Which one works better? Answer truthfully not just because this is a chapter
on loss aversion. Well, is it the second one? Why, though?

Look at the first message. What does it tell you?

You’re doing fine, but you could do better.

“Well meh”, you say and you aren’t alone. It simply lacks urgency. It surely
mentions an opportunity but doesn't tell you anything about the cost of your
inactivity.

The second one hits you with an appeal:

You’re not doing fine, far from it. You’re losing already, and you must do
something to stop this.

One of our favorites, the persuasion guru Robert Cialdini had

something to say about it. Many years ago when starting our
company, we met him at a conference and asked for advice.

”Use loss aversion”, he said. And we sure did just as in our next
example.

Taxify: If you snooze, you lose (evening

naps, everyone)
Recently Uber was banned in our country, but this story takes
place before that. Our client Taxify, which was at the time in direct
competition with Uber, approached us with a simple task.

Our goal was to increase the effectiveness of their online

advertising aimed at potential drivers. In other words, to get
more of the core target to click on Taxify ads.

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 Loss Aversion

We aren’t an advertising agency. Our approach to creating ads is

different. We took a close look at the psychology of potential
drivers . Many drivers work other jobs too, so it’s always tempting
to put your feet up after work and just chill.

What could win people over to snatch an opportunity to drive

after hours?

In short: loss aversion and the endowment effect (more about

that as we progress).

What we did was to replace the original text:

“Earn decent money driving your own car. No minimum hours,

freedom to drive whenever you want,”

with a simple question, “Would you rather sit at home in the

evening or easily earn an extra €60?”

Would you rather sit at home in the evening

or easily earn an extra €60?

Earn €60 in one evening.

Ride with your own car and earn.

Hundreds of drivers in Bratislava.

This framing evokes the sense of loss the target audience would
incur if he or she didn’t take the opportunity to drive and earn.
And the word “easily” helps so that the choice feels like no
brainer.

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 Loss Aversion

We put our ads to the test against the original ads. The results?
Conversions rose by 54%.

Note that the copy referring to loss is subtle and implicit. “Don't
miss out on great opportunity” is so overused and instantly falls
into a category of an unwanted ad, which is what the customer
subconsciously and instantaneously turns away from.

What you wanna do instead is to paint a picture, offer a

metaphor which feels less like a too good to be true invasive
marketing message and more like an insider tip.

The core of this subtle message is the contrast it paints between

not doing anything and losing as a direct result vs. doing
something (what CTA points out to) and gaining because of that.

“ Introduce loss aversion by using contrast between

the two options people have. What you want your
customers to do vs. them choosing to do something
else. By comparing the two, you can highlight what
they stand to lose if they don’t comply.

Useful tip:

There’s dating and then there's loving.

While loss aversion is one of the most powerful motivators of action, it can be
detrimental when trying to induce a long-term behavior change.

Think of loss aversion as a one-time lucky charm, which turns the odds in your
favor. Asking someone on a date or convincing someone to sign up for a
product by reminding them of what they might lose if they say no might work.
That one time.

To make them fall in love, with you or your product, however, is a completely
different animal. When used as the primary tactic to motivate an action that’s
repeated frequently over time, it will backfire.

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 Loss Aversion

Your date, and your customer, will get used to the threat and become immune
to the risk of loss. Might we add they might consider you a fool too. If you want
to accomplish long-term behavioral changes, there are better guns to stick to.

The 2016 US presidential election

If you are reading this in the distant future and Trump’s
presidency serves just as a reminder of how crappy things used to
be, we envy you. For everybody else out there, despite not
knowing how it’ll end, because we sure don't, we can at least tell
you how it all began.

You’ve seen it everywhere on pens, cup holders, mugs, umbrellas,

bikinis and most famously on hats.

Four simple words on a red background: “Make America great

again”.

Contrary to general belief, the real resource to “make it great

again” according to Trump was not technological leadership (that
was the domain of the educated elites, booo), but skilled manual
labor.

Trump’s campaign targeted those who felt that what they had to
offer was no longer valued by America. And not only that,
emphasizing that the little they had claimed ownership of was
currently being threatened by cheap labor force and immigrants.

The offering of Trump's presidency was framed as the “last

chance.” Only he could make America great again, as it once was.
The emphasis was on the country which was according to his
claim, losing out because of the current political establishment.

He positioned himself as a central figure of this new change.

No one else at a later date could accomplish the same task.
A perfect loss aversion.

Would you not listen to the appeal of the only chance you had to
recover your social and financial status? Most people did. In fact,
they turned out in such record numbers in the swing states that
the opposition was overwhelmed.³

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“ Think of ways to reframe your message so that it
highlights what your customers stand to lose if they
don’t do what you want them to do.

Loss aversion has two ramifications - the IKEA effect and the
Endowment effect. Let's start with the former.

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 Loss Aversion

The IKEA effect

Did you ever get anything from IKEA and assembled it yourself?
Say you bought a table, brought it home and, using the tiny
screwdriver that comes with it, spent couple of hours assembling
it. In the end, you wound up with two or three loose screws, but
it’s no biggie, they surely pack in some extra ones, right? The
table is solid enough and has become the centerpiece of your
room. You like it even more than the one you saw earlier on
display.

Let's say you paid €99 for it. Imagine your friend comes along and
asks to buy it from you for this exact amount of money. Would
you agree?

You wouldn't, not unless he gave you more money than what you
spent on it. Maybe a 150 would do, perhaps even more. It’s no
longer just an ordinary table to you because the effort you put
into to it means something to you.

That’s what the IKEA effect is about.

“ When you put effort into something, it becomes more

valuable to you than its objective value.

Fun fact:

If you’re a (copy)writer, you surely know how hard it sometimes is to erase your
own alternative or preliminary ideas and first drafts, even though you’ve
already fine-tuned and transformed them into something you like better. Yet
it’s uncomfortable to do because the words you’ll be erasing are not just some
words, they’re YOURS and your effort too, and that counts for something, even
if only to you.

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 Loss Aversion

Case study: Lottery tickets

How can you increase the subjective perception of value
without having to ask people to assemble something? Which can
be quite impractical in real world. Make people choose it.

Research shows, we feel a greater sense of ownership and value

an object more when we’re given the opportunity to choose it.

In one study, people were placed into two groups. All of them
were given lottery tickets for free. Subjects in the first group were
free to choose their own lucky numbers, while the unlucky
gamblers in the second group had no say in the matter and were
assigned their lottery tickets.

Useful tip:

Let people choose something instead of assigning it to them and they will
value it more.¹

The ones who were able to choose their tickets valued them
roughly four times more than those who were assigned theirs.
When asked to sell their tickets, those who picked their lucky
numbers asked on average for $8.67 compared to the ones
robbed of the opportunity to choose who only asked for $1.96 on
average.⁵

Fun fact:

Lotteries are a great way to test how regret avoidance impacts our decision
making. When trying to purchase lottery tickets from people for twice the
amount they had paid, most people refused.

The rational choice would always be to sell the ticket and buy more tickets and
cash in on it.

But we aren't known to be rational. We worry that we might be selling a

winning ticket and that would be much more unbearable than missing out on
an opportunity to earn a little money off side.¹¹

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 Loss Aversion

“ Make your customers contribute or at least give them

the feeling they contributed.

Another way for the IKEA effect to kick in is make your customers
put effort into the final product, such as customizing it. It turns
out that customization only adds value to products which are
perceived as an extension of our identity, so customizing kleenex
doesn't do much, while doing so to a pair of sneakers does.

Fun fact:

In 2018, Netflix used the IKEA Effect in a clever way in their Black Mirror movie
Bandersnatch, where they let their audience at certains crossroads in the story
choose from two options for the character, ranging from mundane and
insignificant like what cereal to have for breakfast, to (spoiler alert) something
grandiose and somewhat uncomfortable like whether to kill his father or not.

The audience as well as us, certainly valued such a unique story way more, and
if they wound up not liking it, they could easily blame it on their ‘bad’ decisions.

This clever design also enabled Netflix to extract important data on what the
majority of audience wants to see. Certainly a twofer for them.

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 Loss Aversion

Case study: Nike By You

If you always wanted to be a shoe designer, now is your chance.
Color, shape, perhaps even a personal quote, all at the price of the
IKEA effect.

Useful tip:

Depending on the kind of business you’re in, your customers should be

included in the whole process. For example in our consulting business, we try
to make our clients feel they have contributed and that their ideas have been
taken into consideration.

It doesn’t have to be anything major, but they need to feel like they’re involved.
So think of ways of showing your customers that there’s a part of their own
ideas in your final solution or product, whatever they may be.

We’ve already talked about the power of progress in the part on

Perceived Effort and you’ll read about it again in the chapter on
Choice Architecture. If you remember, seeing progress is
extremely motivating. It makes us advance and the more
progress we’ve made, the less likely we are to give up.

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Why is it so? Well, the IKEA effect plays a great role. More
progress means more effort and more effort means a higher
assigned value, which we don’t want to lose.

“ Highlight the progress your customers have made.

The bigger chunk of the journey they have made so
far, the less likely they are to give up.

Useful tip:

If you are managing a team, bear in mind that when your people put effort into
something, they value it more than is its objective value, and so you should
appreciate it accordingly.

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 Loss Aversion

The Endowment effect

Think of your favorite old pyjama bottom, the one your partner
swears is going to get mysteriously misplaced one day. You admit
it's rather shabby with holes in almost inappropriate places. You
even consider it fair that you aren’t allowed to wear it if the in-
laws are visiting. But you love it dearly and wouldn't give it up. To
your partner it’s a rag, to you, it's priceless.

There’s something profound about us humans and our sense of

ownership and possession. It starts at an incredibly early age and
if you ever saw a toddler throwing a fit, just because their toy was
currently taken by a sibling, you know what we are talking about.
In fact, it intensifies and grows as we grow older.⁸

Prior to reading this, you might have been clueless as to why you
feel this way about your old pyjama bottoms, but now you can at
least blame it on the endowment effect in the hope your partner
will appreciate the science behind it.

There’s an old adage, “a bird in the hand is worth two in the

bush.”

Your customers won’t care about the second bird unless you
point out to them how close they are to getting it. Your job is to
convince them the second bird is not to be missed out on.
Perhaps it’s almost theirs already. The endowment effect might
nudge them to go explore the bush.

That's why car salesmen offer you free test drives before moving
on to the purchase process. They know the best line to use is to
get you hooked.

“ When you own something you value it beyond its

objective value.

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 Loss Aversion

Greed vs. (no) need

Winning something and giving it up vs. losing and trying to get it,
those decisions are miles apart.

Precisely how far away they are was evaluated by Dan Ariely and
Ziv Carmon. Duke University basketball games provided a perfect
opportunity to examine it under real-life conditions. Because
there isn’t enough space for everyone before important games
there’s a lottery between fans. The prize is a ticket to the game.

After one of the lotteries, the winners (now ticket owners), were
asked by researchers how much they would be willing to sell their
ticket for.

On the opposite end of the spectrum were the losers who were
asked how much they would be willing to buy the ticket for.

Better hold your jaw or you might drop it; the selling price point
was almost 14 times higher than the buying one!

The winners wanted $2,400 on average for their tickets, while the
losers were willing to buy them for only $175.

Once the winners got the tickets, they valued them to a higher
degree and giving them up became much harder. On the other
hand, those who lost in the lottery did not value them as much.

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 Loss Aversion

If someone asked $2400 for a ticket you would probably ask why.
The researchers did, and most of the winners argued about how
important this specific game was for them and how much they
didn’t want to miss it. On the other hand, the lottery losers
mentioned only the money.

When we become owners, loss aversion begins to work. We

consider changes in terms of gains and losses, and the latter are
more prominent and important to us in a given situation.²

So as with nearly everything in this course, it’s largely about the

feeling and perception. It can be hard to get people to own
something, but it’s quite easy to make them feel like they own
it, or make them imagine they do.

Let’s dig a bit more into it.

If you try it, you keep it

To minimize the fear of future regret, more and more e-shops are
giving you an option to order a product, try it at home and only
pay for what you really want to keep.

A nice example is Warby Parker, an eshop which offers a wide

range of eyeglasses and sunglasses.

You can order up to five frames, try them on, return those you
don’t like and only pay for the ones you like and intend to keep.
But as you might discover, choosing the ones to send back might
prove to be difficult.

Once you’ve tried them on in the comfort of your own home,

without a security guard gazing up over your shoulder and into
your bag, perhaps even combined them with your favorite outfits
you already feel like you own them. Perhaps you even found that
different pairs match different outfits.

The feeling like they’re yours already kicks in. You start to value
them more, thus making a decision on which of your glasses to
dispose of becomes harder. Besides, you could always use an
extra pair that’s simply fantastic with your angora sweater.

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 Loss Aversion

Fun fact:

Being able to return something makes you keep it.

As we live and breath decisions, it makes us question our own choices.

One of our colleagues tried to get to the bottom of her proclivity for ZARA
clothes (they have a great app you read about in Uncertainty), they also have a
great return policy- no questions asked.

It’s a relief to get cash back instead of a coupon for the next purchase (how
short-sighted of you, H&M).

As a result, she doesn't buy an H&M item unless she absolutely loves it, whereas
in ZARA, where the anticipated future regret is eliminated with a risk free
decision, she buys something even if she’s not that sure of. She can postpone
the weight of the decision because she can always take it back. Which she, as
you might suspect, rarely does.

Free trials
Picture signing up for a free trial of Netflix. It’s 3 AM, and you’re
finishing up the fourth season of a show you’ve been binging.
You’re sleep deprived, but quite content. Maybe you feel like you
might have outsmarted them.

So stupid of them to give you all that access for free. What you
don't realise is that it was you who have drawn the short straw.
“How so?”, you might ask.

FYI, Netflix doesn't offer a free version beyond the one month
trial, but there’s one business which uses the power of free, a
decoy and loss aversion all in one.

It‘s Spotify.

Along with Spotify free, which offers you music for free, but is
frequently interrupted by ads and doesn't allow you to play songs
in any order but shuffle.

They too offer a monthly trial of the premium version with no

ads. So you get the full freedom to play whatever your heart
desires at any given moment.

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 Loss Aversion

Throughout the month, you discover the full value of the

premium version. But the month is over. You’ve had it and now
you’ve lost it. To make matters worse, the free version no longer
feels like a good deal.

You might embarrass yourself by trying to renew your trial by

creating a new email account, to keep the trial going for a little
longer. But sooner or later you’ll succumb to the power of
subscription.

Would that happen if you never tried it? No way!

What these companies hit you with, is nothing but a perfect

marriage of loss aversion and endowment effect. Yeah, the joke’s
on you.

Useful tip:

What if we told you that sometimes it doesn't even take a free trial to achieve
the same effect. With right messaging, you can make people imagine they
own it without actually trying it on.

If you aim to sell any product, ask questions which result in the endowment
effect.

Let's say you want to sell a TV. What is the most common question you would
probably ask a customer? Perhaps something similar to “How can I help you?”

What is the most likely answer you are gonna get?

“Thanks, I’m just looking around” (uh-oh, not exactly what you wanna hear).

What a missed golden opportunity! Imagine you switched it up and asked

instead:

“I see you’re interested in this TV. What are you going to watch most often?”

As your customer ponders to answer, he thinks of football, gathering with

friends, of beer and fun and laughter and showing it off with great resolution.
The perfect scenario is already in his head and so is a little harder to give up.

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Learn from the best

Apple stores are designed to maximize the endowment effect. No
wonder they are the most profitable retail outlets in the world.

Visitors are allowed to play with products and explore all of their
bells and whistles for an unlimited amount of time. Employees
are instructed not to urge any visitor to leave, as creating the
experience of ownership is of the utmost importance.

Guess who else does that?

Have you ever felt like you just walked into someone’s house
when cruising around the showroom at an IKEA store? You’d
hardly get the same experience at The Home Depot.

It is no wonder since the devil is in the details. That's why the

design of each room starts with a detailed brief including
information about an imaginary family who inhabits the space
(yeah, they think of everything, and even the family’s household
monthly income is included).

The interior designer comes up not only with the final design of
the room, but also with a story.

Each piece of furniture is purposefully placed to help the shopper

imagine it could be theirs and their home. If you open up a vanity
stand you’ll find actual rings and bracelets. It's not just a drawer
anymore, it could be yours and you already start picturing your
jewelry in it.

27
“ Make your customers imagine what it would be like to
own your product or service.

Fun fact:

For those of you who don't easily lend their office mug to anyone;
here is a study to cheer you up.

Imagine you were given a mug and asked how much you would
sell it for? Got it?

Now imagine you were asked for how much you would buy the
same mug from you colleague for?

Seriously, really think about it.

The study found on average it is $7.12 to sell vs. $2.87 to buy.⁶

The price of endowment. What was yours?

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 Loss Aversion

Case studies
Taxify
You’ve heard the long and the short of what we’ve already done.
Apart from the banners which used loss aversion and social proof,
we also used some featuring the endowment effect.

When the endowment effect was induced with a simple question

“How would you use an extra €750 a month?”, the conversion
rate went up by 57%.

As people read the ad, they started imagining what would they
use the money for and suddenly it was harder to give the money
up even though they hadn't earned it yet.

Drive and make money! With Taxify you drive

whenever you want and how much you want.

How would you use

an extra €750 a month?

Register and drive!

Weekly payouts.

Telco operator #1
Another one of our projects was a campaign for a telco company
which aimed to get more of its customers to activate a package
of free mobile data.

29
 Loss Aversion

The only channel to target them was via a text message. The only
thing we asked of them was simply to say yes to our request by
responding to the message.

The original CTA fell short on any endowment,

“Answer YES and we’ll activate the package for you”, was
replaced with the endowment- inducing CTA:

“We’ve given you a mobile data package for free, it’s ready to be
used. Just answer YES to activate it.”

We saw an increase in conversion rates as people concluded the

data was already theirs and responded to the appeal in higher
numbers.

Telco operator #2
When we’re “given” something by default, which is what you get
if you don’t actively make a choice, it becomes more valued and
you loath to part with it.

After an Italian telecom company had raised their rates, many

people started calling to cancel their service. By a clever change
of the original call script, the company was able to retain more
customers.

Initially, the customers who called to cancel their service were

informed that they would receive 100 free calls if they kept their
plan. It didn't really work.

The script was then changed to, “We’ve already credited your
account with 100 calls. How could you use them?”

Many customers did not want to give up the free talk time they
felt they already owned, so they stayed.¹³

“ Frame your message in ways that makes customers

feel like they already own your product.

30
 Loss Aversion

Key takeaways
The long and short of it.

Loss aversion is a strong principle deeply rooted in our brains.

We’re more influenced by what we might lose than by what we
stand to gain.

You can use this by reframing the message in terms of what’s at

stake or use two of its ramifications: the IKEA and the
Endowment effect.

The IKEA effect is a cognitive bias which makes us place a

disproportionately high value on things we put our effort into
creating. It doesn't have to be physical, and it also applies to ideas
and ownership of our work.

The Endowment effect, in case you want to get real fancy, is also
known as the mere ownership effect in Social psychology, which
tells us when we own something, or imagine owning it, we
ascribe more value to it merely because we own it.

What to keep in mind so as not to lose your customer:

• What customers consider as the price reference point

determines whether a price difference will be perceived as a
gain or a loss.

• Introduce loss aversion by using contrast between the two

options people have. What you want your customers to do
vs. them choosing to do something else. By comparing the
two, you can highlight what they stand to lose if they don’t
comply.

• Think of ways to reframe your message so that it highlights

what your customers stand to lose if they don’t do what you
want them to do.

• When you put effort into something, it becomes more

valuable to you value than its objective value.

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 Loss Aversion

• Make your customers contribute or at least give them the

feeling they contributed.

• Highlight the progress your customers have made. The

bigger chunk of the journey they have made so far, the less
likely they are to give up.

• When you own something you value it beyond its objective

value.

• Make your customers imagine what it would be like to own

your product or service.

• Frame your message in ways that make customers feel like

they already own your product.

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 Loss Aversion

Ideation prompts
Our guiding questions which will help you to think about how
to use loss aversion:

• What will my customers lose if they don’t decide for my

product or service?

• How can I highlight what my customers will lose without my

product or service?

• How can I use contrast to highlight what my customers stand

to lose?

• How can I highlight the effort and progress my customers have

made?

• How can I include customers in the creation or personalization

of the final product?

• How can I make customers feel like they already own my

product?

• How can I make customers imagine what it will be like to own

my product?

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 Loss Aversion

Additional readings
• A must read if you own a photo studio or are considering
having your pictures taken. For everyone else, a fun read about
a clever use of loss aversion, the endowment effect and
anchoring.
https://www.uxmatters.com/mt/archives/2011/09/decision-
architecture-in-the-wild-a-real-life-example.php

• A catchy Ted-ed video about the endowment effect

(psychological and practical explanation)
https://www.youtube.com/watch?time_continue=11&v=H2_by0r
p5q0

• A 3 minute-long explanation of the endowment effect

https://www.youtube.com/watch?v=bvjoIAhaIxI

• A longer but detailed explanation of loss aversion by Dan Ariely

https://www.youtube.com/watch?v=YpiGVWO-C64

• Papers of Experiments done with the endowment effect

https://www.hbs.edu/faculty/Publication%20Files/11-091.pdf

• Recommendations for subject lines

https://econsultancy.com/45-words-to-avoid-in-your-email-
marketing-subject-lines/

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 Loss Aversion

References
1. ARIELY, D.; HREHA, J.; BERMAN, K, 2014. Hacking Human Nature for Good: A
Practical Guide to Changing Human Behavior.

2. CARMON, Ziv; ARIELY, Dan, 2000. Focusing on the forgone: How value can
appear so different to buyers and sellers. Journal of consumer research, 27.3:
360-370.

3. GOHMANN, Tim, 2016. How Donald Trump Won the Election: A Behavioral
Economics Explanation. behavioraleconomics.com [online]. [Accessed 18
January 2019]. Available from: https://www.behavioraleconomics.com/how-
donald-trump-won-the-election-a-b

4. HANDAL, Matt, 2013. The One Question That Can Dramatically Increase Your
Proposal Wins. Help Everybody [online]. [Accessed 17 January 2019].
Available from: https://tinyurl.com/yctgja92

5. LANGER, Ellen J, 1975. The illusion of control. Journal of personality and

social psychology, 1975, 32.2: 311.

6. KAHNEMAN, Daniel; KNETSCH, Jack L.; THALER, Richard H, 1991. Anomalies:

The endowment effect, loss aversion, and status quo bias. Journal of
Economic perspectives, 5.1: 193-206.

7. KAHNEMAN, Daniel; TVERSKY, Amos, 2013. Prospect theory: An analysis of

decision under risk. In: Handbook of the fundamentals of financial decision
making: Part I, p. 99-127.

8. PAHWA, Aashish, 2018.. The Psychology of Ownership in Marketing.

feedough.com [online]. [Accessed 23 January 2019]. Available from:
https://tinyurl.com/ycm6rwff

9. PURI, Ritika, 2016. Loss Aversion Marketing Tactics And Strategies That (Still)
Work6. The Braze [online]. [Accessed 13 January 2019]. Available from:
https://tinyurl.com/y7lkfqau

10. ROLLER, Colleen, 2011. How Anchoring, Ordering, Framing, and Loss
Aversion Affect Decision Making. UXmatters.com [online]. [Accessed 25
January 2019]. Available from: https://tinyurl.com/y8cstb63

11. SILVERSTEIN, Sara and OCBAZGHI , Emmanuel, 2018. Why most people
refuse to sell their lottery tickets for twice what they paid.
businessinsicer.com [online]. [Accessed 20 January 2019]. Available from:
https://tinyurl.com/yczbdme7

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12. TAYLOR, Marcus, 2014.. How Creating a Sense of Urgency Helped Me

Increase Sales By 332%. CXL Institute [online]. [Accessed 12 January 2019].
Available from: https://conversionxl.com/blog/creating-urgency/

13. WELCH, Ned, 2010. A marketer’s guide to behavioral economics.

mckinsey.com [online]. [Accessed 28 January 2019]. Available from:
https://www.mckinsey.com/business-functions/marketing-and-sales/our-
insights/a-marketers-guide-to-behavioral-economics

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MINDWORX
ACADEMY

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