Loss Aversion
Stakeholder communication can backfire in unexpected ways.
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Common business habits are unwittingly influenced by psychological phenomena. One particular phenomenon that has far-reaching consequences is called loss aversion.
In my previous article — about The Ultimatum Game — I told you about Dutch primatologist and ethologist Frans de Waal, who has done a lot of research over the years on the behavior of apes and monkeys. There is another scientist carrying out experimental games with monkeys and other non-human animals — like dogs — and that is professor of psychology Laurie Santos of Yale University. She has done quite a few very intricate games with capuchins to see if their economic behavior matches our irrational human economic behavior. We’ve already seen that De Waal made capuchins angry by giving them pieces of cucumber instead of grapes, and Santos took things a step further.
In one experiment, she had a colleague show a monkey one grape and then subsequently give him either one grape, or two grapes, at random. Another monkey was shown two grapes and then — again, at random — given either one or two grapes. So, to be clear about this, the end result was exactly the same for the monkeys — they were given either one or two grapes at random. The beginning was a different experience for them, however, and the question was, does that matter? And the answer is yes. The game was played several rounds with numerous monkeys and the results were the same each time. The monkeys that were shown only one grape to start with, were fairly happy throughout the experiment. They were shown one, and sometimes got one, sometimes got two grapes, nice! But the other group was not so pleased. They were shown two, and sometimes got two, but also sometimes only one grape, not so nice! What’s going on here? Why the grumpiness, if the end result is the same in both cases — either one or two grapes, at random. The answer is that this is a case of loss aversion — which was described by Nobel Prize winner Daniel Kahneman in his so-called prospect theory.
We’ve already run into Daniel Kahneman in one of my other articles, Thinking Fast & Slow, and now we meet Kahneman and his colleague Amos Tversky again, in light of the prospect theory, which they developed in 1979. The basic premise of the theory is that the prospect of losing 10 dollars feels much worse than the prospect of gaining 10 dollars feels good. Hence the concept of loss aversion: we have an aversion to losing something we already have, much more so than an appetite for getting something we want but don’t have yet — even if we don’t have things physically in our hands but only see them, the effect already takes place.
Back to professor Santos and the capuchins, because they did some more tests in relation to loss aversion. One experiment went like this — and bear with me, this is tricky to keep track of in your mind.
Grape salesman A shows the monkeys one grape and then — when the monkey gives a token — he always gives the monkey two grapes.
Grape salesman B also shows one grape, but then gives the monkey either one grape or three grapes. In other words, from the monkey’s perspective, this guy is more riskier to give the token to, because you could end up with only one grape instead of the sure two grapes you’ll get from A.
As it turns out, monkeys are risk aversive in this experiment and prefer salesman A over salesman B — they would rather have the sure 2 grapes. But now for the second part of this experiment.
Grape salesman C shows the monkeys three grapes and always gives them two grapes.
Grape salesman D also shows three grapes, but then gives the monkey either three grapes or only one grape.
Now, the monkeys show irrational behavior. They now prefer salesman D over salesman C, apparently trying to avoid the loss of grapes given. They would rather take the risky chance of maybe getting the three grapes over the sure loss of one grape with salesman C. This is exactly what loss aversion is.
Does this relate to human behavior, you might wonder, and the answer is a full-blown yes. We humans show the exact same irrational economic behavior in real life. Instead of grapes, you could use money to illustrate the same behavior with humans.
Let’s say you have 100 dollars and if you give person A 10 dollars, A will always give you 20 dollars back. If you give person B 10 dollars, he will sometimes give you back your 10 dollars, sometimes 20 bucks. If you’re allowed to give either A or B 10 dollars a few times in a row, most people will choose A every time, since he’s a sure bet — your wealth will absolutely surely accumulate. We generally find B too risky — we might end up with the same we started with.
But if we switch things around again, like with the capuchins, our attitude changes. Let’s again say you start with 100 dollars. If you give person C 10 dollars, they will surely take the 10 dollars. If you give person D 10 dollars, they will sometimes return your 10, but sometimes grab 20 dollars instead. As we saw with the monkeys, in this case, we turn irrational all of a sudden and most will actually prefer person D — since there is a good chance that we are able to hold on to our money every round and end up with exactly what we started with. We don’t want to part with our dear money so easily. We are aversive to loss.
The money case described above is quite simplistic, but if you make it more complicated, like, for instance, make it a stock exchange, then things get really complicated fast. The thing is, the loss aversion still applies, no matter how complicated the system. This is exactly the reason for people holding on to plummeting stocks and bonds for way too long, resulting in bigger losses than necessary from a rational point of view. People hate to part with what they have in their possession and somehow hope — irrationally — that they can hold on to assets that could become worth more again, but are in fact becoming worth less and less.
How does loss aversion relate to our modern work environments then? One thing I’ve seen in so many organizations is the use of stretched goals. You will encounter them in traditional project management projects — with Stretched Project Goals, but also in Agile environments — with Stretched Sprint Goals, or Stretched Program Increment Objectives. What it basically comes down to is, we have a certain main goal set, but if we reach that goal and happen to have extra time and resources available, we’ll go for the stretched goal and try to reach that too. From experience, I can say, that rarely happens.
What you’ve done then, when you’ve told your stakeholders up-front about the stretched goal, is that you’ve shown your stakeholders two grapes, and ended up giving them only one. We saw what happened with the capuchins — they got pretty upset after several rounds of that, whereas the monkeys that were always shown one grape and sometimes given two grapes, were happy as a clam. The same holds true for your stakeholders. If you reach your Sprint Goals every two weeks, but rarely your Stretched Goals, your stakeholders are going to get grumpy — they won’t be able to help themselves. Even though, rationally speaking, they always get good value from your team, they’ll feel like they’re missing out on something — they “lose” the value of the Stretched Goal every two weeks.
So, only tell your stakeholders about your one main goal. Your aim is to reach that one main goal all the time — every sprint, every project, every program increment, et cetera. If you can find time and resources to do something extra after you’ve already reached your main goal, then by all means, try and reach a secondary goal that you figure out on the spot (the most valuable to complete as soon as possible). If you also manage to reach that secondary goal, imagine the surprise and happiness of your stakeholders when you present them the result. Never use Stretched Goals, avoid the loss aversion.
If you are interested in stories like these and more, you can buy Essential Psychology for Modern Organizations from Amazon and other bookstores: https://www.amazon.com/Essential-Psychology-Modern-Organizations-scientifically/dp/B08NP12D77/
