… or why Tiger Woods does better when putting to save par than when trying for a birdie
Daniel Kahneman and Amos Tversky are two of the most notable pioneering figures in the field of the psychology of judgment and decision-making, and behavioral economics, with Kahneman winning the 2002 Nobel Prize in Economic Sciences for his research in these fields.
One of the concepts they studied was that of loss aversion. Imagine the following situation:
The U.S. is preparing for the outbreak of an unusual Asian disease, which is expected to kill 600 people. Two alternative programs to combat the disease have been proposed. Assume that the exact scientific estimates of the consequences of the programs are as follows: If program A is adopted, 200 people will be saved. If program B is adopted, there is a one-third probability that 600 people will be saved and a two-thirds probability that no people will be saved. Which of the two programs would you favor?
In an experiment, this question was posed to a large group of doctors. 72 percent of the physicians chose the certainty of saving 200 people, while only 28% chose the riskier alternative of trying to save everyone.
The doctors were then asked this question:
The U.S. is preparing for the outbreak of an unusual Asian disease, which is expected to kill 600 people. Two alternative programs to combat the disease have been proposed. Assume that the exact scientific estimates of the consequences of the programs are as follows: If program C is adopted, 400 people will die. If program D is adopted, there is a one-third probability that nobody will die and a two-thirds probability that 600 people will die. Which of the two programs would you favor?
… a whopping 78 percent chose to gamble all the lives …
In these alternatives, we have framed the outcomes as the certainty or probability of life or death. What did the doctors choose? A lowly 22 percent chose the certainty of killing 400 people, while a whopping 78 percent chose to gamble all the lives with the riskier strategy of trying to save everyone.
Now Here’s the Amazing Thing
Now here’s what’s amazing. The two scenarios, A vs. B, and C vs. D are MATHEMATICALLY IDENTICAL! E.g. Saving 1/3 of the population is identical to letting 400 people die. The only difference between the two scenarios is the FRAME of saving lives or killing people. In the case above, the majority of physicians were so fearful of the certainty of killing anyone, that they were willing to gamble everyone’s lives. Kahneman and Tversky named this psychological phenomenon loss aversion, and we are all affected by it to one degree or another.
Loss aversion isn’t limited to hypothetical situations posed to doctors. Professional golfers can also suffer. Professors Devin Pope and Maurice Schweitzer of the Wharton School produced the paper Is Tiger Woods Loss Averse? Persistent Bias in the Face of Experience, Competition, and High Stakes. In their studies on golf performance they found that even professionals like Tiger Woods are significantly less accurate when putting for an eagle or birdie (2 under or 1 under) than if putting for par, bogey (1 over) or double bogey (2 over). The desire to avoid a loss IMPROVES even a professional’s performance.
Even if we aren’t professional golfers, or astute physicians, the majority of us are affected by loss aversion. Some common examples include:
- Holding onto a losing stock investment
- Refusing to sell a home with a mortgage substantially above its market value
- Going to a play that you really don’t want to see because you have already paid for the tickets
The Principle in Action
Here are some real life examples of this principle in action:
- Motor vehicle license demerit points start at a high number, but as a driver garners infractions they “lose” points.
- Great sales promotions always have deadlines. If you don’t buy before the deadline, you will “lose” the great deal.
- Landlord’s take damage deposits when you start your rental agreement, and refund the balance after deductions for any damages at the end of the term. No one wants to “lose” their damage deposit.
- Membership programs will often cite, “member since 19XX”. People often renew their memberships just so not to “lose” this tenure.
Loss aversion permeates your client’s mind. Find ways to reduce its impact and watch your sales grow.
photo credit: Jon-Luke
