Pitfalls of Leadership: Loss Aversion

ZOMBIES!!!

The year is 2012. All of those Mayan calendar people you thought were wackos turned out to be right, and the world as we know it is falling apart. Zombies roam the countryside, infecting people with a heretofore unknown disease. As the President of Yourfirstnamehere-istan, you have been approached with two plans and must make a choice that will have far-reaching implications for the 600 citizens of your once-fair land. The two plans presented to you are as follows:

Plan A – If adopted, 200 people will be saved.

Plan B – If adopted, there is a 1/3 chance that all 600 citizens will be saved and a 2/3 chance that none will be saved.

Have you made your decision El Presidente? When you have, stand at your desk, pound your fists on the table and shout, “As the most high sovereign ruler of Yourfirstnamehere-istan, I declare that it shall be Plan ____!” But wait, a messenger has arrived with a second set of options, they are:

Plan C – If adopted, 400 people will die.

Plan D – If adopted, there is a 1/3 chance that no people will die and a 2/3 chance that 600 people will die.

So, which plan did you initially choose – A or B? What about from the second set of alternatives – C or D? If you are like most people the decisions you made have a great deal to do with your fear of loss.

AFRAID TO FAIL

If you take a minute to consider the options put before you above, you’ll notice that options A and C are identical probabilities, as are B and D. That being the case, why is it that people choose A over B at a 3 to 1 ratio, and D over C at a 4 to 1 ratio? Doesn’t make sense does it? Until you consider the framing of the questions – questions framed as a loss are avoided in both cases. Social psychologists who study loss aversion find that people are typically twice as upset about a loss as they are pleased about a gain. I’m sure it took a decade and millions of dollars to tell you what my Dad, a financial advisor with Morgan Stanley/Smith Barney could have told you. His phone doesn’t ring much when he is making people money, but he got a lot of calls in 2008 and 2009.

LIFE AND LOSS

It goes without saying that no one likes to lose (and leaders hate it more than most); in this sense our fear of loss is natural and can be protective at times. However, it can also be damaging at times when it distorts our view of the world or leads us to not even play the game. I’d like for you to consider the most meaningful thing you have ever done. I’m not sure what it is, probably couldn’t even get in the ballpark. What I would wager however, is that it took a measure of risk, uncertainty, and hard work to achieve. To strive for certainty is to doom oneself to mediocrity. The irony of obsessive loss aversion is that our worst fears become realized in our attempts to manage them. The only way to never risk heartbreak is to never love, but what could be more heartbreaking than that? The only way to never risk failing is to never try, but not trying is the greatest failure of all.

Source: http://incblot.org/uncategorized/loss-aversion/

Leave a comment

Filed under Articles

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s