Thursday, June 6, 2013

Loss Aversion: Use Loss-Framed Messages To Be More Persuasive

Loss Aversion Causes Risk Averse Behavior

Loss Aversion refers to the behavioral principle that when measuring the risk of loss vs. the opportunity for gain, where both are possible, "losses loom larger than gains".[1] In other words, people are risk averse when making a decision that involves both possible gains and losses. Therefore whether it may be an investor weighting investment opportunities, start-ups weighting their need for patent strategy, or politicians calculating their political moves, their decision will be influenced more by the prospect of loss than the prospect of gain when both factors are equally present.

Loss Aversion - Why You Should Care: Persuasive Messaging

If you can frame your messages to appeal to loss aversion they can be more persuasive. In other words, loss framing will usually have a stronger persuasive effect on behavior than gain framing[2]

Zion Credit Card Case Study

In this experiment, credit card customers who had not used their card in the previous 3 months were randomly selected and assigned to gain framing or loss framing conditions.[3] Depending on which group they were in, the customer received either a message through telephone or mail that was gain framed or one that was loss framed.[4] Examples of the messages and the framing received can be seen in the tables below. 

Loss Framed: Disadvantage of Checks
Gain Framed: Advantage in Using ZionCard
“In using checks you can only lose in comparison to using ZionCard!!”
In Using ZionCard you can only gain in comparison to using checks!!”
“Using Checks does not provide you with protection against theft or loss!!”
“Using ZionCard does provide you with protection against theft or loss!!!”

Loss Framed: Disadvantages in Cash
Gain Framed: Advantages in Using ZionCard
No Free credit for up to one month.
Free credit for up to one month.
No continuous tracking of your expenses.
Continue tracking of your expenses.
Inconvenience in daily use.
Convenience in daily use. [5]

Thereafter, the customers that were in the loss framed group had twice the amount of utilization (card use) and total amount of dollars charged on their credit card than those in the gain framed group[6].

Therefore, the results are clear. In regards to credit card usage, loss framing has a much stronger effect[7]. Case studies are necessary in other domains, but the results are likely to translate. Perhaps Patent Consultant Firms framing their messaging in regards to the defensive need for patents, as opposed the income they can derive, is prudent marketing[8].

Like this post? For more on loss aversion see Loss Aversion Keeps you From Higher Stock Returns.

[1] Daniel Kahneman, Thinking Fast and Slow, 415.
[2] Yaov Ganzach and Nili Karsahi, Message Framing and Buying Behavior: A Field Experiment, 15. (For examples on when Loss framing is less persuasive stay tuned for my next installment on the topic of Loss Aversion).
[3] See Ganzach, supra note 2, at 12. In relevant part: “Two hundred forty-six credit card owners, who live in the country's three largest cities, were randomly selected from all customers who did not use their cards in the three months preceding the study. They were randomly assigned to either gain framing or loss-framing conditions.”

[4] Id.
[5] Id. at 13-14.
[6] Id. at 15.
[7] Id.
[8] See Kalu Kalu, The Patent Portfolio Theory: How Aggregation and Synergy Increase Patent Portfolio Valuation.

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