Prospect Theory & Loss Aversion
Daniel Kahneman, Nobel Prize winner and renowned behavioral economist, introduced the concept of "loss aversion" in his Prospect Theory. This theory posits that individuals feel the pain of a loss more strongly than the pleasure of an equivalent gain. The fear of missing out weighs heavier than the excitement of potential gain. We’re not here to discuss why; today we’ll explore how this psychological quirk allows salespeople to influence decision-making. Let’s dive in.
You probably have an idea where this newsletter is going, right? Incorporate loss aversion persuasion tactics; close more sales. For shorter sales cycles, this is true. But there's nuance needed in longer cycles.
Imagine presenting a potential client with the options:
Approach A: anchors around the potential gains of your product or service. This is typically what the customer expects in a sales call.
Approach B: emphasizes the losses clients might incur by not choosing your solution. Overdone, this is what customers expect from less ethically-minded sellers.
Approach C: understands that the relationship will be ongoing (and that fear can only be a motivator for so long). Loss aversion can be the activation energy for the change initiative. Positive reinforcement of how your product / service advances the unique interests of decision makers is the long-term fuel. Loss aversion should be the bridge to being accepted as a consultative seller who will drive the client outcomes that matter.
The ironic part of this topic is that us humans are biologically set up to poorly handle crucial conversations. Our "fight-or-flight" response, originally designed to protect us from physical danger, can also hijack our behavior during interpersonal conflicts. When faced with a challenging conversation, our brains’ reactions are largely powered by the amygdala where our primal instincts prioritize self-preservation. Productive dialogue, powered by the brain’s frontal lobe, is set aside. So instead of immediately regretting our words and berating ourselves with "What was I thinking?!," it's more helpful to ask, "What part of my brain was I thinking with?"
What can you do? While reflection is helpful, there’s no denying courage is a critical component here. Confront your fears. Ask yourself:
Am I living in the realistic worst-case scenario? We often exaggerate the likelihood of things going wrong.
Can I handle it if the worst happens? Usually, reality is less dire than our fears. You can almost always address problems as they come.
How can I minimize the risks? Thorough preparation and empathy go a long way. Practice your approach and anticipate different responses.
Am I getting emotional? Red flags to proceed with extreme caution should pop up if you sense an emotional wave coming on. Staying measured, objective, and non-combative (i.e. focusing on behavior observations not character attacks) is key.
You got this.
These crucial conversations will happen with customers, your leadership, peers, and loved ones. Work to minimize the lag time between conflict and resolution is step 1, 2, & 3 to conflict resolution. You can then find common ground and build from there.
85% of employees experience some degree of conflict at work (source). Conflict is incredibly common; dealing with it head-on isn’t. You’re less confrontational by addressing problems early to prevent further escalation because you’re preventing issues from multiplying.