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Mental Models
Featured Models

Loss Aversion

This mental model validates the old expression, ‘a bird in the hand is worth two in the bush’. In fact, researchers found that when betting on a coin toss, participants were consistently motivated to bet on the 50/50 outcome when the potential gain was more than two times greater than their potential loss.  Loss Aversion is a cognitive heuristic where ‘losses loom larger than gains’.  HIGHER SENSITIVITY TO LOSS. This model means that the pain of a loss will be much more significant than the satisfaction from an equivalent gain. Win $100 on a raffle and you’ll be happy, but get fined $100 for speeding and, according to this model, you’ll be disproportionately upset.  CORE TO BEHAVIOURAL ECONOMICS.  Loss Aversion will hold a special place in the hearts of many behavioural economists, as it was one of the early findings uncovered by researchers Tversky and Kahneman that informed Prospect Theory and underpinned their approach as captured in the Fast and Slow Thinking model.  APPLICATIONS.  Understanding Loss Aversion helps you to influence behaviour in a variety of contexts. Want someone to take a risk or motivate them into action? Try to connect with what they might lose rather than what they might gain. By the same token, understanding how the fear of loss might lead to risk-averse inertia unless the challenge can be reframed.  Specifically, this model can inform:  Sales commission structures: pay commissions upfront then deduct when milestones aren’t met. Product and marketing strategy: by offering free trials or focus on discounts over returns.  Behaviour change: using Commitment Contracts, see Actionable Takeaways for more on that. Change management and communications: reframing perceived losses.  See the Actionable Takeaways below for more on these approaches.  It's a useful model but also be aware that there have been inconsistent results in some studies relating to Loss Aversion — see Limitations below for more.  IN YOUR LATTICEWORK.  This model both connects with and helps to explain the Endowment Heuristic, of overvaluing things that you already possess, and the Sunk Cost Fallacy, of not being able to let go of past losses. In that sense, it also helps to explain the Lock-In Effect, where customers display inertia and remain with an existing service despite seemingly better alternatives. The Regret Minimisation Framework is a way of tapping into Loss Aversion and challenging you to ‘live into’ your Opportunity Cost, focusing on potential regrets to help give you the confidence to take bold action. 

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