We experience the pain of a loss much more acutely than we experience the pleasure of a gain. One result is that we overreact to price increases.
Asymmetrical reaction to price fluctuations
Imagine you’re at the supermarket, about to buy your favorite brand of peanut butter. If you see that the price has dropped, you’re mildly pleased. But if you see the price has increased by the same amount, you get that awful sinking feeling. Disappointed, you put it back on the shelf and go without.
But it’s not just the potential loss of money that we overreact to. It can be the loss of time, prestige… or a game of football.
The best explanation of loss aversion I’ve ever read appears the book, Sway: The Irresistible Pull of Irrational Behavior. Authors Ori and Rom Brafman give some great examples of how loss aversion can lead us to make the most irrational, self-defeating decisions. Below are two real-world examples from Sway:
1. A pilot’s obsession with getting back on schedule
In the 1970’s, Captain Jacob van Zanten was KLM’s most esteemed pilot. He was their chief flight instructor and even appeared in KLM advertising.
On a flight to the Canary Islands in March of 1977, van Zanten’s 747 was diverted to a smaller, nearby airport. After several frustrating delays, van Zanten — driven by an obsession to get back on schedule — started to take off in thick fog without full takeoff clearance. What he didn’t know was that a fully loaded Pan Am 747 was sitting on the runway, directly in his path.
The KLM jumbo smashed into the Pam Am plane. Everyone on board the KLM flight was killed, as were most of those on the Pan Am flight. There were 584 fatalities – the worst air disaster ever. And it was caused mainly by the KLM pilot’s obsession with living up to KLM’s claim of being “the people who made punctuality possible”. In other words, avoiding a loss.
2. Playing not to lose
When Steve Spurrier took over as coach for the University of Florida Gators in 1990, he spotted a weakness in his opponents’ strategy. The other teams in his conference all played very conservative, defensive games. In other words, they were playing not to lose.
Spurrier exploited his opponents’ obsession over avoiding losses. He had his team take some chances, pass more often, play more aggressively, and try to score. The strategy was a huge success and it illustrates the opportunities that exist when we recognize irrational behavior for what it is.
You’d think the opposing coaches, seeing what was happening, would have changed strategy and played more aggressively. But they simply couldn’t. They had become so committed to the goal of avoiding a loss that for years they continued their losing strategy.
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