Loss Aversion: The Hidden Killer of Progress
Last week I wrote about the idea that in order to maximize commitment and performance on the part of volunteers, it is necessary to give up some control over their activities. I ended with, “Terrifying, isn’t it?” Social science tells us with great certainty that the more a person thinks they are being controlled, the worse they perform. This is known as “the hidden cost of control.” But, as a manager of any sort, we want the reins. The idea of giving up control creates a lot of discomfort for nonprofit executives who are accountable to their boards of directors for results.
Ceding control is a new strategy for most, and even though we have solid evidence that doing so will increase performance of volunteers, most managers don’t cede control to volunteers. Why is that? There are a few reasons:
- No one’s job was ever saved by, “The volunteers didn’t do what they said they would.”
- It is counter intuitive that ceding control will improve volunteer performance.
- Another freaky human bias? Yes!
Ceding control is a change and requires a decision. Why should this—or any—change be such a gut-roiling exercise when all the research, both quantitative and empirical, says, "do it"? Most often, people stay the course in the face of diminishing results. Each of us has sat back in our chair, exasperated and confused about a leader or subordinate’s unwillingness to change in the face of overwhelming evidence. In fact, my friend Amy Braiterman of Blackbaud, recently confided in me her frustration because sometimes clients go against all reason and make clearly self-destructive decisions. “Katrina, what is happening in their heads as they point a gun at their own foot? I just don’t get it,” she said.
Clearly, I needed more information. And, it’s 10 p.m. on the night before deadline. To the well I go, yelling from the home office. “Honey, what do you psychologist types call it when you have a person that has all the facts in front of them to make a good decision, but goes the other way instead?”
He yelled back, “Watching TV right now.”
I shouted, “There’s a lager in it for ya.”
He replied, “Likely it’s ‘loss aversion,’ and I want a frosty glass too.”
Me, “I’m going need two paragraphs and a reference for a frosty glass.” Negotiation completed, here’s what we have from Otis Fulton, Turnkey’s shanghaied psychologist:
Psychology tells us that people are hard-wired to avoid losses. Indeed, loss aversion has an evolutionary history, going back to our prehistoric days as hunter/gatherers. It boils down to this–people who treated threats as more urgent than opportunities had a better chance to survive. In staff meetings and conference rooms we experience this emotionally—the fear of loss is stronger than the prospect of gains. That is what loss aversion means. (KV: In the wild, avoiding a lion today makes you more likely to pass on your genetic material than getting an antelope for dinner today. This tendency manifesting in the wilds of the conference room looks like your boss saying, “Yes, it does look like a good idea, but we don’t know what we don’t know. Let’s pilot this for a year and see what happens.”)
Princeton psychologists Daniel Kahneman and Amos Tversky won the 2002 Nobel Prize in economics for their work on how people make irrational, but predictable, judgments about these kinds of decisions. It turns out that you can measure your own loss aversion pretty simply. Ask yourself, what is the smallest gain that you would need to balance an equal chance to lose $100? For most people the answer is around $200—twice as much as the loss. Kahneman and Tversky’s research showed that the “loss aversion ratio” was in the range of 1.5 to 2.5, depending on the individual—some people are much more loss averse than others.
None of the above makes me particularly proud or hopeful for the human race. It sounds darned near impossible for the average human to make a decent decision. Even if the method or product you are changing to is twice as good as what are doing now, you are only just on the cusp of making that good decision. That is a high bar. And yet, we do ultimately change. Next week, effecting change in the face of the human bias of loss aversion. Write you then.
Otis Fulton, Ph.D., spent most of his career in the education industry, working at the psychometric research and development firm MetaMetrics Inc., Pearson Education and others. Since 2013, he has focused on the nonprofit sector, applying psychology to fundraising and donor behavior at Turnkey. He is the co-author of the 2017 book, ”Dollar Dash: The Behavioral Economics of Peer-to-Peer Fundraising,” and the 2023 book, "Social Fundraising: Mining the New Peer-to-Peer Landscape," and is a frequent speaker at national nonprofit conferences. With Katrina VanHuss, he co-authors a blog at NonProfit PRO, “Peeling the Onion,” on the intersection of psychology and philanthropy.
Otis is a much sought-after copywriter for nonprofit fundraising messages. He has written campaigns for UNICEF, St. Jude’s Children’s Research Hospital, March of Dimes, Susan G. Komen, the USO and dozens of other organizations. He has a Ph.D. in social psychology from Virginia Commonwealth University and a Bachelor of Arts from the University of Virginia, where he also played on UVA’s first ACC champion basketball team.
Katrina VanHuss has helped national nonprofits raise funds and friends since 1989 when she founded Turnkey. Her client’s successes and her dedication to research have made her a sought-after speaker, presenting at national conferences for Blackbaud, Peer to Peer Professional Forum, Nonprofit PRO, The Need Help Foundation and her clients’ national meetings. The firm’s work is underpinned by the study and application of behavioral economics and social psychology. Turnkey provides project engagements, coaching, counsel and staffing to nonprofits seeking to improve revenue or create new revenue. Her work extends into organizational alignment efforts and executive coaching.
Katrina regularly shares her wit and business experiences on her and Otis Fulton's NonProfit PRO blog “Peeling the Onion.” She and Otis are also co-authors of the books, "Dollar Dash: The Behavioral Economics of Peer-to-Peer Fundraising" and "Social Fundraising: Mining the New Peer-to-Peer Landscape." When not writing or researching, Katrina likes to make things — furniture from reclaimed wood, new gardens, food with no recipe. Katrina’s favorite Saturday is spent cleaning out the garage, mowing the grass, making something new, all while listening to loud music by now-deceased black women, throwing in a few sets on the weight bench off and on, then collapsing on the couch with her husband Otis to gang-watch new Netflix series whilst drinking sauvignon blanc.
Katrina grew up on a Virginia beef cattle and tobacco farm with her three brothers. She is accordingly skilled in hand to hand combat and witty repartee — skills gained at the expense of her brothers. Katrina’s claim to fame is having made it to the “American Gladiator” Richmond competition as a finalist in her late 20s, progressing in the competition until a strangely large blonde woman knocked her off a pedestal with an oversized pain-inducing Q-tip. Katrina’s mantra for life is “Be nice. Do good. Embrace embarrassment.” Clearly she’s got No. 3 down.