Reality bites: The pitfalls of loss aversion and how to avoid them

An illustration of a person carrying objects, representing loss aversion

It’s an all too familiar scene; the new product or service venture you were so excited about has bumped up against yet another barrier. That initial sense of momentum, excitement and revolution can all too easily disintegrate into an anxious state of avoidance. So many steps have been taken to avoid risk or effort, that the original ambition has become barely recognisable. And if it ever does get to market, you’re not sure whether you’d actually want to use it yourself.

When creating something new, one barrier we face is the challenge of letting go. Letting go of old systems, even when we know they might not be serving us; when we know that opportunity lies elsewhere. There’s safety and security in not reimagining things at any given point.

This is the natural cognitive bias of loss aversion at work. Loss aversion describes why, for individuals, the pain of losing is twice as powerful psychologically as the pleasure of gaining. The pain felt from losing money – or anything else of value – can feel worse than the pleasure of gaining that same thing.

Knowing that we view potential losses disproportionately to potential gains, it makes sense that placing our trust in a new venture pushes us to work against our nature, and can leave us feeling uncertain. A lack of time or structure for experimentation multiplies that uncertainty, and makes the undertow of loss aversion even more powerful. However, we know that our societies, behaviours and values aren’t staying the same, and that while holding back from bold moves feels safer in the short term, it is more dangerous in time.

Here are some signs you’ve fallen into the pitfall of loss aversion:

You’re competing for credibility against the status quo.

It can be challenging to recognise that as you are creating a new product or service, it begins to compete for credibility with the existing offer. There will always be a fear that developing something too new will risk compromising the existing offer that, although stagnant, is tried and trusted. Perhaps there are even teams in your organisation competing against each other, on similar projects, with little strategic oversight.

Under these circumstances, how will any new idea stand itself up? How will a story of reinvention survive? If you’re feeling tired from fighting for credibility, perhaps you need to be having a different conversation about how and why new ideas are supported.

Your new customer experience is being splintered.

Before something new has proven itself, it’s challenging to secure the time and money required to properly integrate the new experience and the systems behind it, and instead we create bandaid solutions on top of old systems. Unfortunately, this complexity is often felt most strongly by the user.

It’s tempting to think of a new product or service as the new customer experience. But new experiences don’t happen on their own, as neatly as they appear on our journey maps. They form a part of your overall customer experience.

Ask yourself, are there ways to ensure that new experience is seamless backwards and forwards with the existing one? Are the compromises we’re making doing us and our users a disservice in the long run?

You’re carrying the burden of a legacy brand.

Sometimes emerging customer needs can be at odds with the values, customers, and products your brand has come to represent. Particularly when a brand carries a rich history, it can be difficult to position a new offering in a way that avoids any negative associations with the old.

If you’re not willing to let go of that identity and have complete makeover, it might be time to spin off a ‘burner brand’. Thats a spritely new brand which represents different values, and creates different expectations for customers. To your advantage, being transparent that this new brand is backed by the old, familiar one can give customers confidence that they will get something both fresh and trustworthy.

The ‘Minimum Viable Product’ has become an escape route.

Because of the risk involved with launching something new, and the need to do it quickly, it is easy to create a laundry list of improvements to implement once it’s out the door. While it’s useful to not waste time perfecting something before letting customers interact with it, if everyone has an underlying worry that the new product is born to die, you might have sacrificed a little too much in the name of efficiency.

Instead of a minimum viable product, how would we define a minimum loveable product? What are the necessary ingredients for us to love the thing that we are launching? If we pause, do we find that any of those ingredients have been compromised?

So how can you avoid these scenarios?

Loss aversion is a human bias, it’s inescapable. But it thrives under certain conditions. To give your new products and services the best chance they’ve got, consider these routes around potential pitfalls:

  • Create space for prototyping and experimentation. Give yourself the freedom to fail safely, and confidently fall in love with your new ventures.
  • Treat every venture as a reinvention. Be prepared to understand what needs to be let go, whether that is a legacy product, a brand, a perceived constraint, or a set of values that are no longer serving you.
  • Allow focus. Trying to get too many things right is overwhelming for you and your users.
  • Reconnect to your reinvention story and check if you’re still in love with it. Ask yourself, does this bring me joy? Is this the challenging, but exciting step we need to take? The answer might tell you if your reinvention story has been compromised by loss aversion.

If loss aversion is our inescapable tendency to view potential losses disproportionately to potential gains, what if we used it to motivate ourselves by the potential losses in not reinventing systems for the better?