TOUCH THAT AND I'LL KILL YOU: The Amazing Power of Loss Aversion

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Resident Evil 4 is the best game ever made. Hands down.

You don't agree? Well then, let me rephrase: I think Resident Evil 4 is the best game ever made.

No dice? Fine: I think Resident Evil 4 is the best game ever made, but I could be wrong.

There is nothing materially distinct about those statements. They all express an opinion that Resident Evil 4 is the greatest game ever made. But I'm going to guess that your reaction to each of them was incrementally less severe (unless you also think RE4 is the greatest game ever made). Why? Loss aversion.

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The phrasing of the first statement implies that it is impossible for your favorite game to be the best game ever, because mine is. The second statement implies it impossible for me to think your favorite game is the best game ever because I think mine is. The third statement leaves the door wide open for your favorite game to unequivocally be the best game ever. Each modification reduces the pressure on your aversion to having your favorite game not, in fact, be the best game ever.

But I'm getting ahead of myself.

What is Loss Aversion?

The name is certainly descriptive: you have an aversion to losing things. We all do. Human beings tend to demonstrate an interesting phenomenon: we experience losses far more intensely than we experience gains. Chances are, if you found a $20 bill on the street, you'd be mildly excited. But, if you later lost that $20 bill, you'd be majorly pissed. But why? You're back where you started, no worse off. Easy-come, easy-go. Screw that, you say. That Jackson was MINE!

Here are some other examples. Have you ever:

If you answered yes to any of that, then that strange and potent brew of anxiety, excitement, and frustration, that tempest in your stomach and fog in your head is loss aversion.

But, beyond being a universal experience, loss aversion is a significant cognitive bias: it will really screw with your ability to make rational decisions. And, as with all cognitive biases, being aware of loss aversion is not enough to counteract it.

Loss Aversion for Gamers

Loss aversion is commonplace in gamer culture. Fanboy'ism is all about loss aversion. Xbox One gamers don't want to feel like they missed out on all the cool stuff over on the Playstation 4, so they rationalize that loss aversion away by attempting to convince themselves (and everyone else in the foums) that the Playstation 4 is for stupid people. And the reverse is true for PS4 fans. And it was true of the N64 and the original Playstation, and the SNES and the Genesis. It's true of Mac's and PC's, Call of Duty and Battlefield, taekwondo and jujitsu, grape lollipops and cherry lollipops.

Oh, and my dad can TOTALLY beat up your dad. He always could.

It's also present in the scarce-goods model of special/limited/collector's editions. Collectors editions are an example of what economists call "price discrimination": finding a way to get people who would be willing to pay more to do so without pricing-out everyone else. The fact that it's a limited edition helps ensure that, if you are one of those folks willing to pay a higher price, you're duly motivated by loss aversion to do so. If I don't get that CoD-branded remote control car now, then when, bro?

The same principle applies for DLC vouchers and special content for pre-orders or vender specific purchases. Publishers, developers, and vendors love pre-sales for obvious reasons. So, throw a lil' loss aversion in there and watch the numbers ratchet up. And now we have the phenomenon of venders offering unique pre-order content to make sure you pre-order from them. That's just cruel. Do you want the Valkyrie assault rifle from GameStop or the Raider shotgun from Origin? That's right folks: through the magic of loss aversion, you now have to comparison shop for pre-order bonuses. If there's a textbook example of a first world problem, that's it right there.

The Other Side of Loss Aversion

Loss aversion isn't just an Achilles heel to be manipulated for financial gain. It's also a PR nightmare. The trick about loss aversion is that it's really, really easy to trigger, whether you intend to or not. In reality, almost any change can trigger loss aversion, even if that change is for the better. Remember: losses loom larger than gains. People will focus on what the change costs them and overlook the benefits.

Say you're a manager, and you want to switch from one task tracking software to another. The new software is more reliable, easier to access from outside the office, and easier to use. Empirically, it will be a net positive to productivity. You make an excited announcement to your team: "Hey guys! Guess what? As of next week, we're transitioning to Pro Project 64 Professional Edition".

The reaction? Grousing. Lots and lots of grousing. You say "better stuff!" and your team hears "Hey guys! Guess what? An IT rep is going to take over your desk for an hour and install some software that you didn't ask for, while jawing at you about God knows what, and then you're going to have to learn an entirely new UI and workflow in order to regain your current pace of productivity." Your disruption to the status quo triggered the team's loss aversion. It's not that they're unprofessional, or self-absorbed, or immature. They're human, and you inadvertently pushed their buttons.

Now, apply this principle to gamers. On a rational level, online passes make sense: publishers can recover some value out of used game sales and cover some of the cost of server usage by gamers in the secondary market. And, seriously, let's be honest: if you bought the game new, entering an online passcode is really not a big deal. If you're playing a video game, you ostensibly have some time to kill. Spending 30 seconds to enter a code should rate somewhere around "Do dogs prefer hoppy beer or malty beer?" on your list of personal concerns. 30 seconds of your time and you get access to the gated content.

But the practice triggers a loss aversion due to the cost of your time and the denial of unrestricted access to something you paid for. For all its economic and business sense, online passes completely ignored the fundamental psychology of human beings. Gamers got pissed, publishers were painted as greedy pigs, and the whole idea was euthanized.

A similar example is on-disc DLC. Gamers go bananas about on-disc DLC. Holy smokes, we just go ape-shit over that concept. But again, putting aside emotions, think about what's really going on. You and a game maker engage in a tacit agreement: your cash for their product. It isn't a bait and switch: you are given a disc with all of the content you paid for. It just also happens to have other content that you didn't pay for and can't access yet. On-disc DLC is transactionally no different than regular old DLC: you buy the base product and then later pay for additional content. The only difference is that the latter is pulled down from the internet and the former is just unlocked. From that perspective, all the developers and publishers are trying to do is make it faster for you to get the content once you've paid for it.

But, of course, you can't put emotions aside. Developers and publishers think "more efficient delivery vector", and gamers think some combination of:

Now, again, rationally, neither of these arguments actually makes any sense. You didn't pay for access to the on-disc DLC. You paid for a plastic disc and access to the base content. And even if developers or publishers deliberately held back content, so what? That's their release strategy. Your purchase does not entitle you to everything they produced before they submitted the gold master. And again, this is no different than traditional DLC: there is absolutely nothing stopping a developer from deliberately holding back content for later release regardless of the vector.

If you're sitting there fuming at the screen, screaming where I can shove on-disc DLC, that's exactly why the concept didn't work: it tweaks the living hell out of your loss aversion. And if it makes you feel any better, I also have a loss aversion to on-disc DLC. Despite the fact that I just wrote the preceding paragraphs and despite all of my calls for rational thought, something about on-disc DLC just feels wrong.

And that's my point: the reality and the rational argument aren't the end of the conversation. You need to think about how your customer will feel about the product you're selling. Sure, maybe there's no logical reason to get upset about online passes or on-disc DLC, but for whatever emotional reason, it just makes people feel funny/manipulated/abused.

Oh, and remember that time David Vonderhaar tweaked the performances of some weapons in CoD and got shellacked with Twitter death threats? Yeah, guess what that was all about.

XBone'd

Microsoft's launch of the XBox One was a master class on loss aversion and the consequences of not considering it. Let's review - initially, the XBox one was going to:

And we all know how that turned out. To be fair, Microsoft did have some user experience justifications for the always-on connection and the Kinect requirement, but it didn't matter in the face of an all-powerful force like loss aversion. The reaction was so negative Microsoft ended up back pedaling on all of it. And all Sony had to do was say "Yeah, no" and it looked like a collective of forward-thinking, progressive, egalitarian geniuses. Round one: PS4.

How to Manage Loss Aversion

In some cases it's possible to avoid loss aversion by leaving (or appearing to leave) an option open. When expressing an opinion that might be controversial, simply prepend "I could be wrong, but..." or append "That's just my opinion." By doing so, you are providing a psychological safety net: your colleague can engage and consider your idea without the threat of his or her own being wrong. He or she has the option of accepting your idea or sticking with his or her own. The next time you're on the cusp of a heated debate, try that trick.

When the option approach isn't an...option, you can emphasize the benefits of the change, but that only goes so far, and won't really counteract loss aversion. So what is a manager or marketer to do?

I've never worked on an oil rig, but I'm told that the wayto put out a well fire is to set off a big explosion next to it and choke off its oxygen supply. It turns out that loss aversion is analogous. The way to counter loss aversion is with more loss aversion. Specifically, you need to create a loss aversion to inaction.

In the task tracking software example above, if you want to curtail the grousing, you need to position the old crappy software in such a way that it triggers a bigger loss aversion. For instance, indicate that the current software is unsuitable and will result in lower efficiency, necessitating late nights and weekend work. That's WAY worse than learning a new UI.

When it comes to product changes, you need to take a similar approach: if you need to change some key feature or delivery strategy and you want to mitigate backlash, explain why the change is necessary and the problems you want to avoid. Make sure it's clear why the consequences of inaction are worse than making the change.

All that being said, there is a difference between influencing your customers and manipulating them with spin. If you are honestly trying to communicate a true benefit the change creates or a significant problem it avoids, that's influence. Nothing wrong with influence. If you are trying to manufacture loss aversion by spinning a change to mask your true intentions, then you are trying to manipulate people. There's no grey area. You're either up front, or you're not. And if you're not, gamers, a highly connected and very cynical bunch of folks, will probably sniff you out.

Sim City, anyone?

Justin is a video game producer, consultant, and earned his MBA from Northwestern University's Kellogg School of Management. He is currently laying the groundwork to start his own studio. His mission is to leverage my degree to improve the day to day experience of making games through better processes. He write about that at his full blog here: http://breakingthewheel.com

Follow him on Twitter: @justin__fischer (two underscores!)

His LinkedIn profile can be found here