People Really, Really Hate to Lose

Prospect theory from economics has found that the risk aversion finance talks so much about is only half the story. The other half is just the other way around:When people face the prospect of loss, they display a risk preference hoping to avoid the loss. They seek risk; they are willing to pay for risk. In a well-known example, suppose you are offered the following options:

A. Get $30,000 for sure

B. Take 80 percent chance on $40,000 with 20 percent chance of getting nothing

What do you choose? If you are like most people, you will choose A. We know that on average, B is the better choice. The value of option B on average is $32,000. But we don't live our lives on average. Averages are not so interesting when you can choose only once. Most of us are willing to give up some potential gain in order to eliminate risk. This we all know. Thus, on average we get $30,000. We gladly pay $2,000 to avoid risk.

Now consider the following two options:

A. Lose $30,000 for sure

B. Take 80 percent chance of losing $40,000 with 20 percent chance of losing nothing

Now what do you do? Faced with this choice, the great majority of people prefer B.

Thus, on average we lose $32,000. This time around we gladly pay $2,000 to get risk.

These results are useful for marketers. First, if you want someone to buy from you, especially when you are a new supplier or offer a new product, you are asking that person to take risk. Since people are willing to take risk to avoid loss, do not tell them what they will gain if they accept your offer; instead, tell them what they will lose if they do not accept your offer.

Good salespeople for cars or houses love to use this weakness of ours against us. "This is a really nice car for you. But, to tell you the truth, if you don't buy it now, you will lose it for sure. "It works even better if the salesperson adds, "I didn't tell my boss yet, but I have someone else for this car who'll come back tomorrow to buy it. "A shared secret of impending shortage - "Nobody knows this yet "- multiplies persuasive power. 6

6. For more about persuasion, you should read Robert Cialdini's fascinating book:Influence:Science and Practice, Allyn and Bacon, 2001, not just to learn how to be successful in persuasion yourself, but also to learn how to avoid unwanted persuasion by others.

My wife once bought a car and then found out I had to co-sign the loan. Looking at the papers I noticed they had taken her for a ride, adding life insurance on the loan and a maintenance and repair warranty. So I called the dealership and told them I would co-sign provided they take off the insults to our pocketbook. They called her first, and she called me, not too happy:"He said I might lose the car because of you. "How many cars are there in America? One hundred million? She didn't lose the car.

In addition, the loss aversion - rather than risk aversion - we all have means we should look for opportunities in our customer relationships to build in elements of loss for the other party in case the relationship breaks down. We can offer warehousing space, financing, promotional support, and so forth. The more things like this we offer, the more the customer stands to lose when the relationship is broken. As a result, we can demand more and more from the relationship. In fact, we will demand rewards that exceed the expense of our generosity. Customers might obtain a net gain by breaking the relationship, but they might not.

"Might "is the operative word here. Loss aversion biases the customer against walking out on us.

Men Who Are Not Fathers Do Not Like Babies

Research with pupillometers (measuring the dilation of pupils) shows that men who have had no babies of their own will narrow their pupils when shown a baby picture, suggesting dislike and discomfort. This automatic reaction likely is hardwired into our systems by our selfish genes. When a childless man sees a baby, he doesn't see sweet little eyes and nose and fingers and toes; he sees an opportunity for procreation taken up. In nature, a mother lioness must beware that a strange male lion does not kill her offspring. Human males have become more civilized since leaving the trees, but some atavisms remain.

Is this useful Marketing Knowledge? I saw a television commercial by Michelin that showed a diapered baby smiling happily while sitting on a tire riding through thunderstorms, snow, sludge, hail, and rain. It seems the marketing manager of the tire company doesn't know much about young men and babies. Young men who are not fathers do not show one another baby pictures, such as pictures of a new niece or nephew, do they? When they do show baby pictures, they show them to girls they want to put the move on (good marketing). Associating the tires with babies reduces the brand appeal to an important group of potential buyers. I sometimes run into a manager who raises his hand and says, "But there are also many women and fathers who buy tires." My response: "So it is okay to waste advertising money unnecessarily as long as not all of it is wasted? "(Michelin points out to me though that the Michelin brand has security as a key selling point, expressly appealing to the full nest, higher income and safety oriented segment of the market with their baby campaign; and that other marketing communications devices are used by the Michelin brand to appeal to young men who are not fathers.)

Getting Small Favors Gets You to Getting Big Favors

A company I worked with has a sales force of about 200 people. The company's owner, a practical scientist, always looks for interesting experiments to run. Once he heard about a door-to-door sales company where the salespeople ask for a glass of water at the beginning of their presentation. Reportedly, this small request improved the closing percentage. He instructed 30 of his salespeople to ask for a glass of water at the start of their presentation. After a few weeks, he found that sales for the experimental group had increased by about 3 percent. Next, he instructed the group to ask for a soft drink. This request did not help sales at all. This favor was too big to be effective.

This man is a very successful business owner. Let us consider in some detail the way his mind works. First, he reads about what other companies are doing. But, of course, a lot of business people do that. Second, he does not think about whether an idea will work or not work for his situation. He thinks about how he can test the idea, how to find out if it will work for him, or if he can make it work. He is a dispassionate scientist in action. Third, he starts thinking and testing on how he can improve the idea.

There are people who manage and there are people who pretend to manage. Compare the scientific manager and his open - minded experimental approach, to the way of a manager who pretends to be a manager and will look at a new idea and tell you, "I don't think this will work for us. Our situation is different. Our customers are different. "

This is always a very safe statement to make. All situations and customers are different and 80 or 90 percent of new ideas do not work at all. But successful new ideas pay off big. Your skeptical manager, your safe manager, will never make you rich; he or she just saves you money as you stagnate your way out of business. As I mentioned before, the better marketing manager, the real marketing manager, looks to his customers to find out whether this or that idea will work or not.