Loss Aversion & Idea Implementation

by Jeffrey Baumgartner

Loss Aversion & Idea ImplementationYou’ve had a brilliant, creative idea that you believe could become a breakthrough innovation. You’ve researched and modeled the idea’s potential and believe it could generate substantial more revenues for your company as well as reinforce your business’s reputation as a leader in the field.

So, you make a nice presentation emphasising the manifold benefits of your idea and present it to top management. You are convinced they will buy into your idea and are devastated when they reject it as being too expensive, too risky and probably something your customers would not like. What happened? How could they not be seduced by the benefits of your idea?

Your mistake was selling your idea on its benefits. You would have done better to sell it by emphasising the consequences of not implementing your idea. Allow me to explain.

Loss Aversion

We humans have a strong, demonstrated tendency to place more value on loss than we do on gains. In psychology and economic theory, this is called “loss aversion”. For most people, the sorrow of losing€100 seems significantly worse than the joy of finding €100. Loss aversion impairs our decision making process. Imagine you are a senior manager with €1 million to invest in new projects. Two people come to you, each with a proposal. The first proposes a project that will use up the budget, but if it succeeds should earn the company a 100% profit in the first year and 50% annually thereafter. If it fails, however, the initial million will be lost. The second person proposes a project that will use up the budget, but is virtually guaranteed to earn a 20% return on investment annually. Better still, if it fails, you’ll be able to recoup the €1 million. Which option would you choose?

If you are like most people, you would choose the second option. The returns are good enough and you can be sure you won’t lose anything. Sure, the first option looks good and it would be great if it succeeded! But, what if it fails? What would be the consequences of backing a project that lost your company a million Euro? What would be the consequences of backing a project that took up all your budget and yet might fail?

The same thing happens when you sell an innovative new project based on the potential benefits. Of course senior managers would love the company to benefit from the massive revenues your project could bring. But in their minds, they will be considering the consequences of failure. They will ask themselves how much the company will lose if customers don’t fall in love with your new product idea. Even if that loss is smaller than the potential benefits, it will worry the average manager more than the potential benefits would please her.

Working with Loss Aversion

What can you do? Use loss aversion to your advantage. When you present your idea to senior managers, be sure to spend time explaining the loss the company will face if it does not implement your idea. This might include lost market share, reduced income over time and even loss of prestige if you lose your market leadership position. In short, highlight the loss to the company if your idea is not implemented as well as the benefits if it is implemented. if you can do this convincingly, your idea is far more likely to be approved.

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Jeffrey BaumgartnerJeffrey Baumgartner is the author of the book, The Way of the Innovation Master; the author/editor of Report 103, a popular newsletter on creativity and innovation in business. He is currently developing and running workshops around the world on Anticonventional Thinking, a radical new approach to achieving goals through creativity — and an alternative to brainstorming.