5 Ways Loss Aversion Is Hurting Your Business and What to Do About It by @Pamela_Lund

5 Ways Loss Aversion Is Hurting Your Business and What to Do About It

by Pamela Lund | Featured Contributor

Building a successful business is anything but easy. You have to be willing and able to do things that can be not only uncomfortable, but completely paralyzing at times. Taking risks, walking away from bad money, and cutting your losses when things go south are just a few of the things you’ll have to be prepared to do. Any basic business book can tell you all that, but what those books don’t tell you is how hard it is to actually do those things and why most people don’t, even when the payoff is worth it.

Humans are a fairly predictable lot. We usually conform to the status quo so we’re liked by our peers, even when we really want to be different. We work long, tiring hours to buy big houses that we can fill with things we never use but keep “…just in case”. We stay in relationships that don’t make us happy because it’s easier than the alternative. All of these things are prime examples of irrational behavior (AKA doing the opposite of what makes sense), especially if you believe that it’s rational to do what makes you happy.

So, what makes us so predictably irrational? The fear of loss. If you don’t conform to the status quo you may lose your friends. If you don’t buy something you lose out on the feeling you get from owning it. If you leave a relationship you lose that bond and may go a while before finding another. You may be thinking that these particular losses don’t seem compelling enough to be afraid of them, but research has shown that our fear of loss is greater than our desire for gain – and our actions almost always reflect that. We would rather hold on to what we have, what is certain, than to take a risk that may have a great pay off if there’s even the smallest chance of loss.

This fear of loss leads us to prefer our safe, stable, current situation over change, even when we’re unhappy and something different would be in our best interest. Now that we’ve established that loss aversion is a very real factor in our daily lives, here are five examples of how it might be affecting your business:

KEEPING THE WRONG CLIENTS

The fear of losing income can prevent you from logically and rationally evaluating your relationship with problematic clients. While walking away from business you worked hard to earn might feel counter-intuitive, there is a very real benefit to terminating bad relationships – so much so that it will translate to higher income in the long run.

If you are unhappy working with a client it will negatively affect you on a subconscious level and you won’t have the time, energy, or confidence to pursue new and potentially more lucrative clients that would be a better fit. You may even find yourself working harder for unhappy clients than you do for your best clients, making the problematic ones not only nuisances, but unprofitable ones at that and your best clients will inevitably become dissatisfied too.

SAVING WHEN YOU SHOULD BE SPENDING

It’s hard to appreciate the immense value something will have in the future when all you can focus on is the current value of the money coming out of your bank account. Coupled with loss aversion, this may prevent you from spending money on something that will benefit your business in the future because the “loss” of the money you spend is felt before the “gain” of the future benefit. You will likely feel this type of loss aversion the most during a downturn in your business. When money is tight you will be less likely to pay for marketing or conferences even though that is exactly what you need to invest in to generate new business.

NOT CUTTING YOUR LOSSES

When you work for months or years on a project you inevitably develop a relationship with that project, so it seems impossible that you might not see it through to the end. It can even become a part of your identity, which makes the fear of loss that would come from walking away from it even greater. But the reality is that not all projects will succeed, no matter how hard you try, and you need to know when to cut your losses and move on.

In this case, you’re working against both loss aversion and the sunk cost fallacy. That winning combination means that the more time and money you put into a project the more desperate you are to see it succeed because you want to recoup what you’ve invested. If it doesn’t succeed, you’ll lose everything you put into the project, which triggers fear of loss in a big way, but you need to be able to recognize when it’s time to walk away so you don’t end up investing and ultimately losing even more.

MAINTAINING THE STATUS QUO

Think about your competition. Are you doing the same things in the same ways they are? Do your websites all look similar? Are your services, products, and pricing nearly identical? This happens in most industries because it’s easy to look at what’s working for someone else and decide to just do that too, even if you could be doing something unique. Loss aversion causes this by making you afraid to challenge the status quo, potentially losing out on the business you’d get from doing what everyone else is doing. You may also fear the loss of your image, respect, or clout if you try something new and fail. Once again, that fear of “losing” prevents you from taking a chance that could pay off in a big way.

SPENDING SCARED MONEY

Most business owners have recurring expenses for services and subscriptions they never use but think they will in the future. If there is a penalty for cancelling, such as a higher rate for resubscription or a loss of grandfathered features, people will keep wasting money each month due to the fear of losing what they have now (the lower rate or additional features). These expenses are generally small individually, but in aggregate they can be significant. Usually, the cost to re-subscribe if and when the service is needed again is less than what you would have spent on maintaining the lower cost subscription, but loss aversion prevents you from logically evaluating the expense.

STEPS TO COMBAT LOSS AVERSION

Reframe the decision to see change as a gain and inaction as a loss. For example:

I will lose out on the opportunity to sign a new client if I don’t go to the conference.

I will lose the ability to work on the new project if I keep slogging through the failing one.

I will lose the chance to be better than my competition if I keep doing the same thing they do.

Use milestones such as the end of a quarter or a new year to make major changes. Scheduling and processing changes so they don’t feel arbitrary and unplanned will frame the changes as a necessary part of growth. For example:

Which clients are my most profitable and which can I let go this year so I can acquire more that are like my best clients?

What projects have I been focused on this month that are taking resources away from my priority projects?

What can I do differently this quarter to set myself apart from my competition?

Recognizing that fear of loss makes you play it safe (and ultimately not at your best) while also consciously choosing to make growth-focused decisions will keep loss aversion in check so you can build the business of your dreams.

 

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