What is Loss Aversion?

Have you ever experienced FOMO — the “Fear of Missing Out”?

It’s a form of social anxiety that makes people scared they’re being left out of exciting or interesting events. It’s usually triggered by posts on social media, where it looks like the whole world is having fun without you.

If you suffer from FOMO, you’re not alone. A recent study found that 70% of millennials experience the fear of missing out regularly. There’s a profound psychological principle behind why people experience FOMO.

It’s called Loss Aversion, and it can be a powerful design mechanism for guiding customer choice.

What is Loss Aversion?

First identified by Nobel Prize-winner Daniel Kahneman, Loss Aversion is a psychological principle that says people will go to great lengths to avoid losing.

In fact, the psychological pain of losing is twice as powerful as the pleasure of winning.

Because it’s so powerful, Loss Aversion features heavily in cognitive psychology and decision theory. It’s also one of the most effective tactics for getting customers to buy (the other being Social Proof).

A customer’s hatred of losing can take lots of forms, each with fascinating applications.

How Information Is Presented Can Dramatically Impact What Decisions People Make

“Losses loom larger than gains.” — Daniel Kahneman

For example, a study was conducted to see if framing cancer treatments using Loss Aversion could improve surgery opt-in rates.

The research team hypothesized that opt-ins rates were related to how the options were framed.

To test this hypothesis, doctors presented patients with two options. Each framed surgery as a potential gain or a possible loss — the results were staggering.

1. Surgery framed as a gain: “The one-month survival rate of surgery is 90%.”
2. Surgery framed as a loss: “There is a 10% chance of death in the month post-surgery.”

When framed as a gain, 84% of people chose surgery. But when framed as a loss, only 50% opted in. This simple application of Loss Aversion increased surgery opt-ins by 54%.

Ownership Creates Emotional Bonds That People Don’t Want to Break

This principle is known as the Endowment Effect. It’s a psychological principle that falls under the Loss Aversion umbrella.

In “Predictably Irrational,” Dan Ariely describes this effect through the lens of Duke University basketball.

If you’re unfamiliar with Duke basketball, all you need to know is the Duke-UNC game is the biggest of the year. And that it takes place in an area of the country where basketball is a religion.

To score tickets to this game, students have to camp out for weeks. They then enter a lottery for a chance to win tickets.

Ariely reached out to students who won tickets and those who entered the lottery but didn’t win. Both had invested the same amount of pain, sacrifice, time, and effort to enter the lottery. But some had won, and others hadn’t.

Would this affect how each group valued the basketball tickets? The results were interesting. Students who were not successful in the lottery said they’d pay an average of $170 for a ticket. But the students who did get a ticket? When asked how much they’d sell their ticket for, they asked 170% more for their ticket — about $2,400 on average.

The question is — why were the owners asking so much for their tickets? The answer - emotion.

According to Ariely, once someone owns a product, they begin fantasizing about their future experiences. Once they create these “pre-memories” of the game, ticket-holders don’t want to lose out.

So these students wouldn’t only be selling a ticket. They’d be losing out on potential memories, emotions, and good times. The lesson — the more emotions associated with a product, the more people value it.

How to use Loss Aversion in customer experiences

1. Create FOMO with “only a few left” messaging:

Booking.com does a great job using Loss Aversion to nudge sales. When customers are browsing hotel deals, they see a message like the one above — “Only 6 rooms left on our site!”

This copy pushes customers who might be on the fence to buy before they miss out.

2. Create a sense of impending loss with a countdown clock

3. Create an emotional bond with free trials:

If you want to produce the Endowment Effect (like Ariely in the basketball example above), a free product trial is effective.

Once your product is in a customer’s home, an emotional bond is developed through use. The feeling of ownership is a powerful psychological tool for getting and keeping customers.

In this example, from Dropbox for Business, a 30-day trial starts creating an emotional bond.

Here’s How to Apply Loss Aversion

The danger of using traditional Loss Aversion signals is that they can come across as spammy. “Last chance!” “Hurry!” (and in emails, these words can get your email sent directly to Spam)

People are smart, and they don’t want to feel like you’re manipulating them.

The Bottom Line

So how do you use Loss Aversion without sounding spammy?

It’s simple — have empathy for your customers. Dive deeper to truly get to know their pains and fears. Here’s how:

1. Understand specifically what your audience is afraid of losing
2. Understand why they’re so scared of losing this thing
3. Develop materials that address their worries, and give them a potential solution

Only after you know your customers better than your competitors can you effectively frame an offer using Loss Aversion.