Editor's Letter

March 23, 2017

Avoiding a Loss or Seizing a Gain: Which Drives You?

Imagine you are approached by a person who says he can show you how to avoid wasting $100 each month on your energy bill. Then imagine you are approached by another person who says she can show you how to save $200 each month on your energy bill.

Will you find one offer more attractive than the other?  

Many behavioral economists believe that you are far more likely to be persuaded by the first offer. The decision is motivated by the concept of loss aversion. Most people are far more averse to losing something than they are attracted to a windfall gain. From a psychological point of view, losses are twice as powerful as gains. It is similar to having a bird in the hand rather than two in the bush. So if a proposition is framed as avoiding waste or loss of resources, we may be more motivated to act than if we are promised something that we see as a windfall, even if the latter is twice as large.

Of course the hypothetical situation above doesn’t supply nearly enough information to tell us whether it is smarter to take the $100 or the $200 offer. An FM would need to evaluate the specifics of each person’s solution. But we know that the fear of loss is something that many marketers and politicians exploit adroitly, and that many building owners are loath to make investments in energy retrofits, despite the prospect of future savings.  

I first read about the loss aversion principle in a book entitled Thinking Fast and Slow by Nobel Prize-winning economist Daniel Kahneman. But I had been aware for years of a kind of confirmation of the principle, one that all editors know — that you, dear readers, are drawn more to articles with titles that pose a threat (Stop losing energy!) than to those that present a possible gain (Save big energy bucks!). Readership surveys consistently show that the former get a larger response — about twice as much.

Most of us probably need to push back against our innate tendency to avoid perceived loss. After all, no one wants to be known as the kind of person who is so loss averse that he/she misses opportunities.

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