Defining Loss Aversion
The idea of loss aversion stems from the theory that “losses have a far greater impact on people than similarly sized gains”, as explained by John T. Gourville in “Eager Sellers and Stony Buyers”. To quantify this, in one study by Kahneman and Tversky, it found that a majority of people would not participate in a bet where there is an equal chance that they win or lose $100. This study concluded that the potential gain would have to be two to three times more than the potential loss in order for a majority of folks to engage in a bet. Another study which surveyed Pacific Gas and Electric customers concluded that “people require three to four times more compensation to endure a power outage… than they are willing to pay to avoid the problem.” Both studies, however, concluded that people tend to find losses be more impactful than gains of equal quantity—loss aversion.
Loss Aversion & Buyer Resistance
Loss aversion direct causes buyer resistance—consumers are afraid of what they will lose when they gain new products or features. Gourville explains that “[p]eople irrationally overvalue benefits they currently possess relative to those they don’t. The bias leads consumers to value the advantages of products they own more than the benefits of new ones.” We can connect this to the x9 Effect, which essentially states that because of loss aversion and subsequent buyer resistance, consumers often overweigh the loss of trading in an old product for a new one by a factor of three. It also states that companies tend to overweigh the new product’s benefits by a factor of three, hence the subsequent factor of nine representing the quantified discrepancy of the attitude consumers and producers of a product hold.
Leveraging this Knowledge
A product manager cannot change how humans fundamentally perceive and act upon human nature. However, they can design new features and products in a way to minimize buyer resistance. Since we know there is a significant causation between loss aversion and buyer resistance, one tactic companies can use is making their new features or products feel familiar. This is how Toyota was able to introduce the Prius—while it was not exclusively a gas vehicle, it had “both the traditional internal-combustion engine and an innovative, self-charging electric engine. The result is a driving experience that is virtually identical to that of a gasoline-only car”. So, it did not feel like a sacrifice of the old, but rather, a way of retaining the old while gaining new advantages.
