In this article, the author will tell you about the nature and influencing factors of loss aversion, as well as the application of loss aversion in products.
Before we get started, let’s do two interesting experiments:
The first set of experiments:
The people participating in the experiment (abbreviation: subjects) each held 1,000 yuan in cash. Next, the subjects were faced with the following two choices:
A: There is a 50% probability of increasing the 1,000 yuan in cash you hold to 2,000.
B: There is a 100% probability of increasing the 1,000 yuan in cash held in hand to 1,500.
The second set of experiments:
The participants held 2,000 yuan in cash. Next, the participants faced the following two choices:
C: 50% probability of losing 1000 cash.
D: 100% probability of losing 500 cash.
Can you imagine what choice you would make?
This experiment is an experiment designed by Nobel Laureate in Economics, Daniel Kahneman. The conclusion of the experiment is:
- The first set of experiments: 16% chose A and 84% chose B.
- The second set of experiments: 69% of the people chose C, and 31% of the people chose D.
As early as 1759, Adam Smith, the father of modern economics, described an interesting phenomenon in his “Theory of Moral Sentiments”: when conditions change from good to bad, people suffer more than when they change from bad to good. There are many joys, and it is believed that this phenomenon is universal.
More than 200 years later, in 1979, Kahneman and Tversky (1979) used experiments to confirm this view: the psychological utility of losses and gains are not the same, and the objective loss is greater than the psychological utility of the same amount of gain, and Name this phenomenon loss aversion. The negative utility from losses is 2-2.5 times the positive utility from gains.
To put it simply, people are generally more sensitive to losses. The pain caused by a loss of 100 yuan needs to be compensated by a gain of at least 200 yuan .
The Essence and Influencing Factors of Loss Aversion
Loss aversion is a ubiquitous mechanism in humans, and the underlying mechanism can be viewed from a neurological and evolutionary perspective. Scientific research has found that the human brain processes gain and loss differently, and the human brain’s processing area for loss is related to the dopamine system.
From an evolutionary point of view, loss aversion is a common mechanism for human individuals to adapt to harsh environments, and its purpose is to maximize the survival and reproduction of individuals.
Ariely, Huber, & Wertenbroch (2005) research shows that although the reasons that affect loss aversion are complex, they can be summarized into two categories: emotional attachment and cognitive perspective.
Emotional attachment, in simple terms, means that the loss of an emotional item is more profound and lasting than the loss of an emotional item. People are more reluctant to give up emotionally attached items than practical items. Therefore, in life, many people suffer from “hoarding disorder”, not because they are lazy, but because they are reluctant. Many people, when selling their favorite items, often ask for higher prices, hoping to make up for the pain caused by losing the item through more material compensation.
From a cognitive point of view, different people have different perceptions of the same thing, and buyers and sellers have different perceptions of commodities, which will cause a gap between the buying price and the selling price. When people are willing to trade, there is no loss aversion.
Loss aversion product application
Status Quo Bias – Certainty and Dependence
Status quo bias means that people have a strong tendency to maintain the status quo.
Change means uncertainty, and uncertainty means the probability of loss. We all prefer certainties and are apprehensive about uncertainties. Be willing to change only when the benefits of change far outweigh the losses.
Why do we miss our home? Because their home is a definite existence, but if two people quarrel every day, break up at every turn, and get divorced, this will create uncertainty and insecurity. Uncertain things, there is no way for you to invest time and continue to rely on.
Applied to the product field, there is a well-known formula that can be illustrated. Teacher Yu Jun once proposed the product value formula:
Product Value = (New Experience – Old Experience) – Migration Cost
Among them, the migration cost is the loss caused by the migration from the old product to the new product, from the definite migration to the uncertainty. If the old and new product experience is poor enough to cover the migration costs, people’s loss aversion will drive people to abandon the new product.
Why is it so easy for a big business to beat a small business? Competing in the same dimension, the bulk is dominant, even if it comes later. In the book “Positioning: Competing for the Minds of Users”, it doesn’t matter whether you are the first to make the product, the important thing is to be the first to occupy the minds of users.
For small companies, even if they are the first to make new products, they do not have enough resources to promote them and occupy the minds of users. Large companies can easily imitate them quickly and come first.
This is also BAT’s usual way of playing, because the cost of user migration is extremely low, and new products do not occupy users’ minds. Large companies use their own size advantages to optimize the user experience bit by bit, and occupy the user’s mind bit by bit. The small company could only be speechless. It’s like a fight between two people, the big guy fights the little guy, and the big guy always wins.
If a small company wants to win, it must innovate. Because, in the new field, users have no migration cost and no old experience. As long as your product achieves 60 points, it is qualified.
Teacher Yu Jun said: ” When you find a blue ocean and a field with zero user experience, what do you need to do? Do you want to release the product after 100 points, or do it after 60 points? Of course, do Hurry up when it’s 60 minutes.”
Small companies have to deal with the time lag that large companies can respond to. In this time lag, iterating quickly and quickly occupying the minds of users is the biggest barrier for latecomers and the biggest migration cost.
Price Sensitive – Lose to retain users
The rise of Internet e-commerce has completely changed the way coupons are used.
In the past, coupons were very rare items, get a coupon, you can be happy for a long time. But now, there are all kinds of coupons on e-commerce platforms, and there are all kinds of strange ways for merchants to discount. You can’t see them without you, only you can’t think of them. The rise of e-commerce, coupons can be said to occupy a large part of the credit. Its core purpose is to make consumers who were hesitant or even not willing to buy products come to buy.
The principle behind coupons is actually loss aversion. By issuing a coupon, and then reminding you repeatedly: “You have a coupon of xxxx yuan that is about to expire, and you will lose a lot if you don’t use it.”
Loss avoidance can be used in many product areas, such as our membership system, point currency, and accumulated miles, all of which are the value you accumulate in the product, and merchants use these potential losses to bind you.
Recognizing loss avoidance, when operating students design copywriting, they know that they can use more words of loss to replace income, “I will give you a coupon of 200 yuan” and “If you don’t receive the coupon, you will lose a discount of 200 yuan. Quota”, users will be more sensitive to the expression of the latter and more easily affected.
In many cases, merchants will also set an effective time in the promotion. Similar to the small store announcements or banners we often hear when we go shopping: “Clearance, big clearance, last day!”. Create a sense of urgency in time. Because of the fear of loss, people are prone to impulse purchases when they are nervous.
Take action — make users fall in love with the product
Loss aversion, one of the more extended points is that users tend to cherish things that can only be obtained at a cost, and often ignore things that are earned. (This word seems to be a bit scumbag) The mechanism is also because users hate losses.
Therefore, in the coupon case mentioned above, the effect of the coupon obtained by the user after a lot of hard work is better than the coupon given away for nothing. Because of the former, users pay costs, such as: the social cost of inviting friends to like, the operation cost of forwarding the circle of friends, and the monetary cost of spending money or drawing points.
In the book “Addiction”, how to make users addicted, the second key step is to make users take action. Once the user takes action, it is equivalent to paying a cost on the product. Although the initial cost is small, the next step can only be achieved if there is action. The product is to continuously make the user take action, accumulate costs, and finally make the user addicted.
There is also a concept in psychology called cognitive dissonance, which refers to: when people’s behavior is inconsistent with their cognition, because the behavior has already occurred and cannot be changed, in order to avoid the discomfort caused by the inconsistency between behavior and cognition, People tend to change their perceptions.
Therefore, when the user is using your product (acting), the user’s perception of the product will be biased towards a good direction (otherwise, a poorly used product is a perception that the user cannot accept).
In addition, from this point can also be extended to our lives. We often encounter such a problem: how to make someone you care about, or how to make a stranger like you quickly? This is very useful for single men, or for newcomers in the workplace, we can actually use the principle of loss aversion to analyze. The best way to make people fall in love with you quickly is not to kneel and lick, not to help him selflessly, but to let him help you.
If you go kneeling and licking, you go to help the other party, which is equivalent to a free coupon, and there is no loss for him. Since human beings are not sensitive to gains, he will not care. Instead, it’s you that cares because you pay for it. In love, it is often said that whoever is serious first loses, there is a certain reason, because people who pay more can’t let go.
And if he helped you, then he paid the cost. Because of loss aversion, he will not dislike you because he does not want his efforts to be in vain.
Also, according to the principle of cognitive dissonance, he helps you (actually happening), he won’t help someone he doesn’t like (cognition), so he will like you, at least not hate you. Of course, what should be noted here is that asking the other party for help should be a little more technical. If it is a very simple thing, then the other party may think you are zz.
In the design of products, there is a strategy to let users participate in the design, and there is also such a psychological application behind it, for example: Xiaomi developer community.
Loss aversion is a ubiquitous mechanism. In product design or operation, we can apply it skillfully to make users inseparable from the product, or even addicted.
To sum up, there are mainly the following ways:
- Product Value = (New Value – Old Value) – Migration Cost. Don’t underestimate the cost of migration for users. Migration cost is not only the economic cost of seeing, but also the emotion that users pour into the old product.
- Price-sensitive users care more about coupons. It should be noted that users will be more sensitive if the operation copy uses loss-oriented vocabulary.
- The coupons that users spend cost and work hard to obtain are more cherished by users, and the usage rate is higher.
- Let users take action, publish more works in the product, and help users establish connections in the product.