Loss Aversion and Raising Money

How do you help your donors and prospects make the leap, give their money in support of your cause, and help them feel like they’ve gained, not lost!

In this blog, we’ll to cover the following areas:

• Loss Aversion - what is it?

• Why do our brains do that!?

• Marketing uses of loss aversion that everyone will recognize.

• How can loss aversion inform how you frame your fundraising messaging?

• Be ethical! Use your knowledge of loss aversion to inform, not deceive.

LOSS AVERSION - WHAT IS IT?

We all have our own stories about the moments when “losses loom larger than gains.” Why? You are much likely to retain information about moments of loss. The time you discovered too late that a $20 bill fell out of your pocket, the sorrow your childhood self felt when the dime store beach ball floated off into the middle of the lake never to be recovered, the hurt of losing companionship of a friend who snubbed you.  

Contrast this with the numerous—but indistinct and long-forgotten—$20 birthday gifts from grandma, the many other little toys you had, and all of the friends you hold dear that you can always count on to be there for you.

Daniel Kahneman and Amos Tversky introduced the concept of Loss Aversion in their landmark paper “Prospect Theory: An Analysis of Decision under Risk” in 1979. Before then, the accepted assumption was that rational decision-making based on optimization was the norm. 

They studied and presented a simple idea that Kahneman referred to in his best-selling book Thinking Fast and Slow, as something that we all know on an intuitive level. “Amos and I often joked that we were engaged in studying a subject about which our grandmothers knew a great deal.”

Loss aversion is a cognitive bias. 

A cognitive bias is formed as a “processing error”—it’s a mental “mistake.” The reason we process loss so deeply is because of the way our brains and bodies react to fear. 

Heuristics and biases are shortcuts our brains give us for decision-making. Our lives would be a lot more tedious if every decision had to be made fresh each time, as though it was the first time. We need these shortcuts for adaptive purposes. They allow us to make decisions and react quickly in dangerous situations. The problem is that sometimes these shortcuts are based on misinformation.

WHY DO OUR BRAINS DO THAT!?

The Amygdala is the brain region that mediates emotional responses, and is often associated with processing fear. Fear is a powerful force meant to keep us safe and avoid danger—an important survival mechanism that can misfire in our modern life. Loss aversion is one of the many ways it misfires.

Fear is overpowering; it takes over in a split section to help us react to danger. It is useful wiring when we see a shark, a snake, or a truck barreling towards us in the wrong lane. We need to react quickly in those moments. But because the reaction occurs in a split second, it can make us feel ridiculous when a friend jumps out the bushes to scare us, or a harmless (and useful) little spider has us running in a panic from the laundry room.

The Striatum is the brain region that handles movement, but it’s also a relay-station for motivation. It sends signals to carry out or avoid actions based on potential reward or punishment. Our past experiences are encoded in this area, and emotions resulting from past risk-taking help us predict an outcome and make a decision based on that prediction. Sometimes this is a useful brain function, sometimes not. 

There are socio-economic and cultural factors at work, too.

Loss aversion affects people differently depending on what kinds of resources or community safety net they have.

People with money, resources, high social status, and power tend to view loss differently. They are less loss averse because they know that they can weather a loss better. They may not weigh the loss so heavily or feel it as strongly.

Culture also has an impact on our reactions to loss aversion. Studies show that people who live in collectivist cultures may be less loss averse, since they were brought up knowing there is a communal safety net. However, people who live in individualist cultures (like in the United States) may be more loss averse. They are taught by their society that they are on their own if things go downhill, and that it is not only their fault, but also their problem to solve. Loss is more dangerous in that context.

MARKETING USES OF LOSS AVERSION THAT EVERYONE WILL RECOGNIZE

There are so many classic marketing strategies that are familiar to all of us; whether we know it or not, we experience them almost every day. They tap into loss aversion in order to get people to act. Let’s take a look….

“Limited-time offer!”

What the brain processes: “I don’t want to miss out - this is a great offer. I need to take advantage!”

”Only 6 left in stock!”

What the brain processes: “Only 6! Once they’re gone, that’s it.  I’ll never have this chance again!”

“This opportunity disappears at midnight!”

What the brain processes: “Ugh, I only have a few hours to make a decision. OK, fine, I’ll do it!”

“We’re saving this in your online cart, but there’s only a few left—don’t miss out!”

What the brain processes: “Oh! Nooooo! I wasn’t sure I wanted them yesterday, but there’s only a few left. I better buy them!”

Countdown Clocks

What the brain processes: “Time is slipping away! I need to do something before it’s too late!”

WHAT DOES LOSS AVERSION FRAMING LOOK LIKE FOR FUNDRAISING?

These same strategies are used for fundraising messaging. After all, we are selling an opportunity to make a difference. The process is the same, but the messaging might look a little bit different. Here’s how….

“Limited-time offer!”  becomes “We’re matching the first $10,000 in donations 2-to-1!”

“Only 6 left in stock!” becomes “We only have 10 more tickets available to our fundraising event, and we will sell out!”

“This opportunity disappears at midnight!” becomes “Help us meet our Giving Tuesday goal. We only have 24 hours!”

“You left these great items in your online cart, but there’s only a few left—don’t miss out!” becomes “We hope you’re still thinking about becoming a member. We have 10 membership available at a 20% discount — don’t miss out!”

And…

Countdown timers become campaign thermometers.

BE ETHICAL! USE YOUR KNOWLEDGE OF LOSS AVERSION TO INFORM, NOT DECEIVE

You might be thinking, “Hey, is this ethical? It feels kind of underhanded and manipulative.”

You are trying to change the world, and you need help. Money helps! Inspiring and encouraging people to act is a good thing. Sometimes people need a nudge. And utilizing loss aversion can be that nudge. Let’s keep a few things in mind, and you can feel good about having the knowledge of the cognitive bias of loss aversion in your fundraising tool box.

Be honest. Be truthful. Be kind.

Make sure your messaging is accurate and honest when using these tactics. Don’t be like the storefront with the “Closing soon! Everything must go!” sign that never actually closes.

Make sure your campaigns come to an end when you say they will (only 24 hours left!), and report back to your donors about what their support will do.

Be kind. Don't hesitate to return donations to people who get their loss aversion triggered, but then regret it later.

MY EXPERIENCE

I am conscious of how loss aversion works on my emotions and how my brain processes it. But I still enjoy a limited time offer. I still love giving during a challenge campaign, and I still pop in to a “going out of business” sale. 

For me, it triggers the same emotions as opening a birthday gift, as discovering a new restaurant, as winning a game of Hearts. It’s a feeling of excitement and reward. 

If I can make other people feel good about their giving, and encourage people to make decisions that will do good in the world, I can feel pretty great about that!