Loss Aversion and Its Effects on Buyer Resistance
Loss aversion, as coined by Kahneman and Tversky, refers to the phenomenon that the potential gains of a wager must outweigh the potential losses by a factor of greater than one in order to be attractive to most people. As stated on page 3 of Eager Sellers Stony Buyers, this can lead to a variety of consequences regarding product adoption, most occurring due to a disparity between the founders’ perceptions of a product versus the consumers. According to Richard Thaler, one of the effects is consumers valuing the products they have (or those in their “endowment”, from economics), more than those they do not possess. In the paper, this was demonstrated via a few different classroom studies, all essentially showing that the subjective value of a good changes disproportionately depending on whether people start with possession of it. In terms of product, consumers evaluate new products as what they gain and lose in comparison to what they are using currently, which translates to a considerable hurdle that PMs and entrepreneurs must overcome in order to persuade users to adopt the new product over the status quo.
How can PMs leverage this knowledge?
Though PMs can’t directly influence the way people behave, they can certainly take this information into consideration to help companies with new product launches. I believe the key to this is in the “Capturing Value from Innovations” graph in the reading. PMs have to consider the factors as explained in this chart, trying to maximize the degree of product change while minimizing the degree of customer behavior change required. This balance is crucial because even minor deviations in product usage are enough to cause friction with adoption. For example, getting an MRI is nearly identical to getting a regular X-ray for the patients, yet the effectivity of the former is over 10x the latter, as explained in the text. Another great example is hybrid cars, which offer extra or free mileage when charged but do not require the user to change their behavior entirely as would be the case with a fully electric car. Therefore, PMs must consider the value add of the additional features as well as how difficult or intensive it would be for the user to adopt it when facilitating the adoption of new features.
