The theory of loss aversion is used in many contexts to explain why potential loss has a greater mitigating influence on behavior than potential gain.
In trading situations, consumers will most likely opt to keep what they have, tending to place a larger value on the items already in their possession (also known as the “endowment effect”). However, these theories generally assume that consumers like what they have enough to want to keep it. What happens when we’re in possession of something we hate?
A new study appearing in the Journal of Consumer Research uses experimental results to show a situation in which the endowment effect is reversed. The authors differentiate between two types of loss aversion:
- valence loss aversion, greater sensitivity to negative change
- possession loss aversion, greater sensitivity to items leaving one’s possession
“A valence loss is defined as any negative development: paying a fine for speeding, having one’s house consumed by fire, catching a bad cold—all can be seen as negative developments, and referred to as valence losses,” explain Lyle Brenner (University of Florida, Gainesville), Yuval Rottenstreich (Duke University), Sanjay Sood (UCLA) and Baler Bilgin (University of Florida, Gainesville).
They continue: “Losses and gains can also be defined on the basis of changes in possession. According to this interpretation, giving up a possession—regardless of its attractiveness—constitutes a “possession loss” and the receipt of an item constitutes a “possession gain.” One can of course lose a desired possession (such as money or a house), but by this definition, one can also lose or part with something undesirable (such as a debt, an illness, or a painful memory).”
In other words, we will tend to stick by what we already have when both options are “good” or risk-free, but the researchers show that when faced with two “bad” choices, we are likely to do the opposite: opt to get rid of what we already have.
For example, in one experiment, the researchers had one group of participants choose between going to traffic school or paying a fine. Two other groups were each assigned one of the penalties and given the option to trade for the alternative. Regardless of the penalty, a larger percentage of participants were willing to self-select it than were willing to keep it when it was assigned, indicating that giving up the penalty was more attractive than receiving it was unpleasant.
“In contrast to the positive problems, for the negative problems there was a tendency to switch away from the possessed option,” the researchers explain. “The results are consistent with the predictions of possession loss aversion—or more precisely that possession loss aversion is stronger than valence loss aversion.”
Lyle Brenner, Yuval Rottenstreich, Sanjay Sood, and Baler Bilgin, “On the Psychology of Loss Aversion: Possession, Valence, and Reversals of the Endowment Effect.” Journal of Consumer Research: October 2007.