We all know the common saying, “is the glass half empty or half full?”. Normally we are talking about whether to be optimistic (half full) or pessimistic (half empty) about a certain situation. The answer we choose can reflect our mood, our outlook or even our worldview. It is a test of perception, because we all know that the same amount of liquid is in the glass no matter how we phrase it. So why does our wording or phrasing affect our outlook? Or is it our outlook that affects our word choice?
Here is an experiment:
Imagine you love really good red wine and these two options occur:
Someone places a glass in front of you and pours you half a glass of wine. You feel ok about this since you have some wine to drink. Maybe you even feel good about your glass of wine. The glass appears half full to you.
Now imagine instead the same person places a glass in front of you and pours it completely full. Just as you go to reach for it, the server grabs the glass back and pours out half of your wine and then places the half glass of wine on the table for you. Now you feel king of upset, a few minutes ago you had a full glass of wine, now you only have half. Suddenly the glass feels half empty.
Even though both examples leave you with the same amount of wine, the emotional response is very different. In the first option you feel pretty good about the amount of wine you have and in the second option you are pretty upset that you didn’t get the full glass of wine. Suddenly you realize that there is a big difference between having a glass that’s half full and a glass that’s half empty.
This is a prime example of a behavioural trait in humans, which Behavioural Economics calls Loss Aversion
Loss Aversion is the term used to explain the theory that humans strongly dislike loosing things. One definition reads, “Loss aversion refers to people’s tendency to strongly prefer avoiding losses to acquiring gains”.
Dan Ariely, the author of The Upside of Irrationality, puts it this way, “Loss aversion means our emotional reaction to a loss is about twice as intense as our joy at a comparable gain”. For example if you find $50 on the street versus lose $50 from your pocket, studies would suggest you would be twice as angry at loosing $50 compared to the joy you felt finding it.
This theory helps to explain why people struggle to give away old unused clothing, why people will pay $10 more to save $2, why gamblers become reckless and bid bigger and bigger hands when losing and even why people sometimes stay in unhappy relationships.
In fact it was first discovered in 1979 when psychologists Kahneman and Tversky studied the different effects of gambling on their students. The explanation for this behavioural bias lies in a specific part of our frontal lobe called the amygdala. This area of the brain is mostly associated with negative emotions and behaviors. It is the amygdala that makes us feel loss as a negative emotion.
Another explanation is the idea that humans put greater value on things which we own than things we don’t own. For instance an old tea mug might only be worth $2 on the open market but to the owner of that tea mug it is worth a substantial amount more. We become attached to things we own and the loss of them is more painful to us than gaining a similar item.
So how does loss aversion affect marketing and advertising?
Clever advertising has caught onto this human behavioural trait and uses it to better sell products or services.
Grocery shops in the District of Columbia tried to incentivize people to bring in their own reusable grocery bags by offers a 5¢ reward for each bag brought in. This incentive had little to no effect on people behaviour.
Next they tried a different incentive. The grocery store charge 5¢ for each plastic bag a customer required. Although 5¢ represents a small fee, it resulted in a major reduction of plastic bags.
This same effect has been replicated by grocery stores across North America with great success.
The success of this example lies in a simple shift from gain to loss. Again, people hate loosing something, even if it’s only a couple of cents.
Pet store everywhere have long known that the best way to entice people to get a new pet is to let them take the pet home for a weekend to ‘try it out’. Whether or not pet storeowners know the specifics of loss aversion, they definitely understand that idea that humans will become attached to the pet over the weekend and have a very hard time giving it back.
Adoption rates of new pets are definitely up with this technique.
This technique also works, to a lesser degree, with trying on clothing at a clothing store, or putting clothing on hold to possibly buy later. Once people have picked something out, tried it on, and put it on hold they begin to feel a sense of ownership over the item and are more likely to purchase it.
You can see the similarities here. By framing a situation as loss rather than gain, greater motivation is generated and generally greater results are produced.
Here’s another example that came up during a conversation the other day.
How do we get people to drive more economic cars? Currently the Canadian government offers varying amounts of money in rebates if you buy an economic car. The way the rebates work is you first pay the full value of the car and then apply for rebates. The rebate comes in the mail months later. This incentive has yet to result in a radical shift by the Canadian population.
If we apply loss aversion theory to this problem we would conclude that a better solution is to discount all cars by the eco rebate amount, lets say $1000 and then make anyone who buys an non eco friendly car pay $1000 to the government after they purchase the car. People hate loosing money so this technique might help convince people to be more environmentally friendly with their purchase.
In the end we know it is all the same thing no matter how you frame it, the glass still has the same amount of liquid in it, the shopping bags still cost your 5 and the a car cost the same regardless of if you pay all up front or in two stages but humans are irrational beings, with complicated brain processing units and one this is for sure, we hate loosing things.
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