Applying the Loss Aversion Principle to Change Communications

The power of a $20 note

A person walking along a city street sees a $20 note lying in the gutter. They look around and can’t see a potential owner so they pick it up and pocket it. How do you think they feel? Pretty good. The small win gives them a dopamine hit, elevating their mood. Just then, the rightful owner of that $20 appears.

They were in a nearby shop and observed what happened through the window and now they want their money back. What do you think the passer by feels? Does their mood return to its original level, before they took the $20? No. It drops below where it began, making them feel worse than before they even spied the money.

Why does this happen? Because of the cognitive bias of loss aversion. For us humans, the psychological pain of losing is twice as more powerful as the pleasure of gaining the same thing.

As a result, we do whatever we can to avoid losses of any type.

Our aversion to loss drives behaviour

This insight can be harnessed in various ways in marketing and communications, particularly in terms of how an issue is framed. Insurance companies, for example, are notorious for evoking our fear of loss to motivate us to maximise our insurance coverage. 

Loss aversion can also help to explain employee resistance to organisational change. 

Take for example this real scenario involving a small manufacturing plan in the US mid-west from the 1970s. Several decades before Covid changed our ways of working forever, the company president announced a shift to flexible working for employees. After learning about the concept at a management conference as a way to boost employee engagement and productivity, he expected the team to embrace the change. Perhaps he might even be shown some appreciation for being so progressive (which it was, at the time)! Instead, he was met with hostility and was ultimately confronted by the trade union demanding he scrap the change. 

What explains this surprising response? It turned out that no one actually knew what flexible working hours meant. The team did not have the information they needed to grasp the impact of change. Rumours started flying. One suggested that flexible hours meant that most people would have to work whenever their supervisors asked them to—including evenings and weekends. 

The importance of communicating “What’s in it for me?”

People resist change when they perceive that it will cost them rather than benefit them. And without the right information, they will fear the worst.

When we communicate change with our teams we must give them the right information. We can’t expect them to know what is in the mind of the president or the CEO. We must start with a narrative that articulates the big picture. It needs to explain why change is needed and how it will enable the organisation to realise its vision.

Next, it must include the “wiifm”- what’s in it for me? We are selfish creatures afraid of having our resources taken away from us. If the team understands what’s in it for them personally, they’ll be more likely to commit to and own the change. 

With the right communications we can help team members feel like they are pocketing a $20 note, rather than as though it’s being taken away. 

References

Galbraith, M. (2018) Harvard Business Review: Don’t Just Tell Employees Organisational Changes are Coming – Explain Why. https://hbr.org/2018/10/dont-just-tell-employees-organizational-changes-are-coming-explain-why

Johnson, E. (2017) Harvard Business Review: How to Communicate Clearly During Change https://hbr.org/2017/06/how-to-communicate-clearly-during-organizational-change

Kotter, J. P., Schlesinger, L. A. (2008) Harvard Business Review: Choosing Strategies for Change. https://hbr.org/2008/07/choosing-strategies-for-change

Kahneman, D., & Tversky, A. (1977). Prospect Theory. An Analysis of Decision Making Under Risk.