The Conflict Resolution Toolbox, 2nd Edition

CHAPTER NINEMODEL #6: THE LOSS AVERSION BIAS

with Cal Furlong

BACKGROUND OF THE LOSS AVERSION BIAS

Reciprocity, as we have seen, is a powerful heuristic for understanding human behavior in many situations, one that can help us diagnose why certain decisions or choices are made, as well as give us strategies for engaging people in reciprocal relationships. As described at the beginning of the previous chapter, both the Law of Reciprocity and this model operate as virtual “natural laws,” deep cognitive patterns that strongly affect our behavior in managing conflict and relationships. This second powerful law for understanding behavior is the Loss Aversion Bias.

Consider some of these strange but common behaviors:

• Taxes vs. Rewards: To reduce the use of plastic bags, it was found that imposing a cost of $.05 per bag reduced plastic bag use by 42%. Yet offering to pay a reward of the same $.05 for not using a plastic bag resulted in no reduction at all.¹
• Free Trials: One of the most commonly used and effective marketing tools is offering a free trial of a service to potential customers. Netflix is one of the most successful companies to market using this approach, converting almost every single one of their free trial users into paid subscribers. Many, of course, initially signed up to get free access for a while, fully intending to cancel before having to pay; 93%, however, stay and pay.
• The Stock Market: When a stock goes up, many people who own the stock choose to sell it ...