By coincidence I read about loss aversion today in Superfreakonomics, then experienced it for myself some hours later. (I’d read the material before, but I wanted a refresher.) The book tells the story (pp. 212–14) of economist Keith Chen training a group of capuchin monkeys to trade tokens (“coins”) for food. At one point Chen and his researchers offered the monkeys either a single grape or two grapes, but, half the time, by chance, they’d add a second grape to the single grape or else subtract a grape from the pair. So, on average, a monkey got 1.5 grapes, and it was statistically irrelevant whether the initial offering was a single grape or two grapes.
But it was not irrelevant to the monkey’s behavior. The monkeys “strongly preferred the one-grape researcher”; they “behaved as if the pain from losing a grape was greater than the pleasure from gaining one,” the book relates. That is, the monkeys experienced loss aversion.
Later in the day I experienced something a little like that. After I referred a friend to my dentist, the dentist sent me a very nice, hand-written note thanking me for my referral; I received the note today. At first I was thrilled: “What a nice gesture, and a nice way to build customer loyalty,” I thought. But then my dentist urged me to “enjoy the enclosed gift card” that was a token of his thanks. I must have left the gift card behind in the envelope, I thought—but no. In irritation I thought, “So where’s my freakin’ gift card?”
Then I remembered the capuchins. Although I never actually had the gift card (much less whatever goods or services it might have procured for me), I thought I had it, and I momentarily felt perturbed that I’d “lost” it. In a flash, I my emotions had turned from gratitude to annoyance. But how silly, I thought; it was still very nice for my dentist to send me a hand-written note, and the fact that he or an assistant accidentally neglected to add the gift card made me no worse off than I was before.
The lesson for businesses is to not disappoint customers by offering them things you can’t deliver. It’s better not to promise something than to promise it and not deliver it. (Of course, businesses can overcome failure to deliver something by apologizing, explaining context, and so on.)
The lesson for individuals is to remember that we are wired for loss aversion—but we are also wired with the intellectual capacity to recognize that there are contexts in which our “gut” may lead us astray here. If someone offers us two dollars gratis but then delivers only one, it’s still a good thing that we got a dollar. And I should let my irritation over the “lost” gift card fade away, and focus on my gratitude that my dentist recognized my referral. It really was a nice gesture on his part.
In short, don’t let loss aversion make a monkey out of you.