Loss aversion, the tendency we have to attach more weight to potential future loss than future gain, has been well-documented since Kahneman, Knetsch and Thaler proposed it in 1990.

Whilst it is hugely important in helping to explain a number of the ways in which consumers act, the simple act of reflecting on decisions of our own that turned out to be costly mistakes that could have been avoided with a little more thought, reveals that it is far from a universal determinant of our actions.

Recently a very good friend of mine made two significant purchases within a matter of weeks: a luxury car and a luxury watch. The car cost him approximately £25,000 and the watch £4,500.

What was interesting to me was that he negotiated hard on the price of one but not at all on the other. In fact, for one purchase he didn’t even shop around, for the other he spent several days exploring options before haggling. The potential saving available was, despite the difference in cost, was very close in monetary terms (and in proportionate terms the potential saving significantly greater on the product he failed to negotiate over).

So why the difference?

In one case, despite the luxury status of the car he purchased, he was buying from a superficially pragmatic mindset. OK, so no one needs a Mercedes to get from A to B, but having decided that he wanted a high quality, comfortable car its functional role in his life meant his decision-making was relatively rational. It’s also the case that negotiating over cars is a social norm, although there will still be those people who don’t do it, or who accept the salesman’s unwillingness to move over price.

The watch was purchased from an entirely different mindset. It was an indulgence, a reward for having sold his business successfully and an engagement present to himself (it’s probably worth clarifying that he’d just got engaged to his girlfriend, and not himself!)

Research so recent that it isn’t yet fully published has investigated how frame of mind can influence the extent to which people are loss averse.

Psychologists from Arizona State University manipulated the mood of participants before asking them how happy or unhappy they would be at gaining or losing $100, or receiving a significant boost in the value of their financial assets.

When men were primed to think about having a romantic encounter loss aversion disappeared. Whereas women primed in the same way became more focused on potential losses.

The view of the researchers, and it’s one I agree with, is that this is linked in to evolutionary drives: a relationship that turns out badly carries more risk to females who pay the higher price of pregnancy and nursing an infant if abandoned.

Crucially for marketers, whilst price discounts can usually be used as a lever to lower people’s resistance and encourage purchase, there are circumstances where it isn’t a powerful consideration. By priming potential customers to think in a way that triggers other psychological drivers, the focus that might otherwise have been directed at getting a deal is shifted away from price.

Source: Arizona State University (2011, October 20). A passing mood can profoundly alter ‘rational decisions’. ScienceDaily. Retrieved October 27, 2011, from http://www.sciencedaily.com­ /releases/2011/10/111020105916.htm

Image courtesy: Brandon Warren