Loss aversion refers to the tendency for people to strongly prefer avoiding losses rather than acquiring gains and some studies suggest that psychologically losses are twice as powerful as gains. Originally demonstrated by Amos Tversky and Daniel Kahneman in the late 1970’s, the idea of loss aversion has been further explored by behavioural economist Dan Ariely in his book, “Predictably Irrational: The Hidden Forces That Shape Our Decisions”. In his book, Ariely gives many examples of research where many people will not take advantage of a significant material or financial gain if it means giving something up.
What does this mean in terms of modern organisations? Well, organisations are constantly adapting to fluctuating circumstances by changing their organisational structures and processes. Most organisational changes are accompanied by a good deal of personal and group angst and varying degrees of resistance to the change. The benefits to the organisation and individuals may seem obvious yet the initiatives are still met with resistance. Loss aversion helps us make sense of this.
For most people, change means giving something up to do something new. Giving the theories of loss aversion, the personal benefits have to be significantly greater than the perceived loss if someone is to embrace change whether at a personal or organisational level. This situation is compounded by the fact that most change processes are usually initiated in a context of little or no information about the change. The norm seems to be that change is rumoured before being confirmed. Given such situations, most people have the chance to think about what they might lose well before considering what might be gained. No wonder people generally do no embrace organisational change!