“Loss aversion” in buyer resistance
Consumers view new products through the lens of gains and losses, giving rise to “loss aversion,” where “losses have a far greater impact on people than similarly sized gains,” according to the reading “Eager Sellers and Stony Buyers.” Despite a product’s promise of creating a new category or revolutionizing an industry, loss aversion could still cause consumers to reject the product in favor of the incumbent product. Contributing factors could be the friction from behavior change, perceived losses of accepting the new product and abandoning the incumbent product being greater than or even equal to the perceived gains, and the endowment effect, where “loss aversion leads people to value products that they already possess…more than those they don’t have.” The 9x Effect, where consumers amplify losses by 3x, and companies amplify the gains from their product by 3x, leads to products’ downfall, as there is a discrepancy between the companies’ thoughts about what consumers want and consumers’ actual desires. Ultimately, loss aversion demonstrates that consumers will only shift to a new product if gains are much greater than losses.
Returning to my hedge fund experience this summer, when I initially talked to an analyst about implementing an AI pipeline for outcome prediction to automate his manual process, I picked up a sense of loss aversion. The analyst expressed uncertainty about the pipeline’s ability to capture all of the necessary data sources he analyzes to make his decisions. Additionally, this AI-based approach would be new for the analyst, resulting in nontrivial behavior change. Both factors may have increased the analyst’s perceived loss he would incur, making him hesitant to take the approach.
Facilitating adoption of new features
Product managers can leverage this knowledge to facilitate the adoption of new features by first “ask[ing] what kind of change they are demanding of consumers” and using that magnitude of change to assess the amount of consumer resistance. From there, product managers should work to accept and manage the resistance, for example by embracing a longer path to adoption or trying to improve the situation by 10x, or minimize the resistance, for example by diminishing the behavior change involved in adoption.
My conversation with the analyst made me aware of his loss aversion and its extent, leading me to think about such courses of action for accepting and managing and minimizing resistance. I recognized that the new AI-based approach would take time for the analysts to implement into their existing workflows, but I also knew that we could cut down the 1-2 week period for evaluating an investment opportunity and use AI to augment the process. I resolved that the pipeline should mirror the analysts’ approach step-by-step and surface an explanatory memo to the analysts via their dashboard to reduce their behavior change.
In the end, the consumer is the one using your product and determining its growth and success. It is critical to incorporate their perspective and give them a seamless experience.
