The Fight Against Loss Aversion

A significant challenge exists for anyone looking to get approval for an improvement programme. It's been proven that a person's psychological response to a loss is significantly stronger than their response to corresponding gains.

This is called Loss Aversion and was first identified by Amos Tversky and Daniel Kaufman

Heads you win…

To explain. Imagine I said to you I’ll toss a coin. If it’s tails I give you £10, if it’s heads you give me £10. Most of you wouldn’t take the bet. Studies have shown that most people would need to be given the opportunity to win £20 in order to be willing to risk losing £10.

This reaction extends into organisational decision making, where loss aversion means organisations are leaving a lot of benefits on the table.

Because of loss version, when weighing up whether to invest in an improvement project, leaders will focus on the cost of the project and think of that cost as a loss instead of focusing on how much the project would save or make. This problem is exacerbated if the improvement suggested is in an area in which they are not particularly well versed. Continuous improvement professionals need to make decision makers aware of this human trait, and work hard to help the leaders fight against it to make decisions logically not emotionally.