Loss aversion is a fascinating psychological phenomenon in which human beings view losses as far more impactful than wins. The reading gave an example of how when given a bet with a 50% chance of gaining $100, and a 50% chance of losing $100, most people will elect to opt out of the bet, despite the expected value being $0. The reading also states that in order to take a bet, people must receive 2-3 times the amount that they would lose if the bet does not work out. This means that another 50/50 bet, with new options of +$150 or -$100, would still not be attractive to most humans, despite the calculations that show a $25 profit is expected with each bet.
Because of this concept of loss aversion, in order for consumers to switch to a new product, their benefit must be 2-3 times greater than any potential losses that would accompany abandoning their current product. While not every consumer is similarly affected by loss aversion, it appears that the mass majority are, reinforcing the status quo bias when a high percentage of the population refuses to switch.
When coupled with companies putting about 3x too much weight on the benefits of their new product, it is clear that there is a clear disconnect between the customer value of the product and the producer’s. There are a variety of ways that product managers can attempt to reduce this disconnect, and allow their company to thrive in this hypercompetitive marketplace.
Product managers can do their best to make the transition from one product to another as simple as possible. By removing the cost of changing from one product to another, the loss they perceive will be decreased.
This disconnect could also be reduced by consistently interacting with potential new users, to ensure that the product your team is working on directly meets their needs. By having these interactions early on in the process, this can also get the user interested in the product and make them more eager to switch. By engaging users early on, the cold start problem could also be avoided, generating a substantial user base prior to launch. By eliminating this problem, the effect of status quo bias can also be reduced.
Product managers can also work with their teams to minimize the risk associated with switching products. For example, implementing a free trial system for certain services could be beneficial in reducing a user’s potential loss in using a new product.
While adopting new features is certainly going to be challenging no matter what, these strategies can help product managers and their teams continue to creatively innovate.
