The Strategic Misuse of Loss Aversion in Social Interactions

Abstract: Decisions are widely influenced by loss aversion (“losses loom larger than gains”). Current theories suggest individuals will be good at using loss aversion as an influence tactic in social interactions (e.g., negotiations). In contrast, across seven preregistered studies, we find the opposite: individuals (n=4173 managers, policymakers, students, adults) are bad at using loss aversion when influencing others. Across 17 (sub)studies, individuals’ rate of optimally using loss aversion ranged from 40% worse than chance (“backfiringly bad” misuse of loss aversion) to 18% better than chance (closer to chance than to optimality). When individuals were given three opportunities to use loss aversion as an influence tactic (by deciding whether to present an outcome as a “gain” or “loss”), only 10.5% of managers and 19.0% of policymakers used loss aversion optimally all three times. In most cases, we find that individuals fundamentally misunderstand loss aversion: individuals think that “gains loom larger than losses.”

Keywords: loss aversion; decision making; social influence

Topic: DEC   |   Format: Full Paper