[Behavioral Economics Series] Loss Aversion

NOTE: This is one of a series of ten blog posts on cognitive biases that have applications in education.

Imagine that we are about to play a game where we pay money to each other based on a coin flip.  If it’s heads, you pay me $10.  If it’s tails, how much would you want me to pay you to play this game?  Don’t read on until you come up with an amount.

Theoretically, you should be comfortable with any amount that is at least $10.  As long as I pay you at least $10, over time you should break even or win.  However, the reality is that most people strongly prefer to avoid losses rather than acquire equivalent gains and that affects what people think.

So, how much did you say I needed to pay you?  Maybe you said something larger than $10?  If so, join the club.  Economists Daniel Kahneman and Amos Tversky showed that most people wanted double the amount they would potentially give up before agreeing to play, even though mathematically, anything more than the same amount should make them money.  They valued the $10 that they currently had at more than $10, simply because they already had it.  This overvaluing of losing what you already have is called loss aversion.

It has been shown to exist in many other realms.  In a school district in Chicago, economists ran an experiment on merit pay.  What was interesting about the experiment was not how the merit pay was calculated but rather how it was given out.  Some teachers received their merit pay at the end of the school year, like normal in this district.  However other teachers received the maximum amount of merit pay at the beginning of the school year and had to pay back whatever they didn’t earn.  To be clear, every teacher would always receive however much merit pay was due to him or her.  The only difference was when he or she got the merit pay.  The study showed that loss aversion, and the desire for teachers who were paid upfront not to have to give money back, “increase[d] math test scores between 0.210 and 0.398 standard deviations” over teachers who didn’t receive the money until after they got their results back.

 

Supply rooms and district warehouses are filled with books and resources from long ago.  Many haven’t been used in so long that it’s hard to recall where they even came from.  Yet a paradox exists.  Simultaneously these two seemingly opposite views happen:

• Teachers are likely to keep these books and resources as long as possible.  So, they have some value to them.
• Teachers are not likely to buy more of these books and resources.  So, they are worth very little to them.

 

Theoretically it shouldn’t be possible for one person to value and not value something simultaneously; but because of loss aversion, it is.  Almost all teachers hold onto resources that were valuable to them at one point, even if they don’t know when or if they will use them again.  Similarly, teachers want to hold on to strategies, lessons, or activities they have used, even if the time to let them go has also arrived. This can cause significant stress if a teacher tries to incorporate new strategies, lessons, or activities in addition to the old ones that they want to avoid losing.

Like with status quo bias and sunk cost fallacy, a potentially effective strategy for dealing with this cognitive bias is to help teachers to see it as a choice between two new options instead of old and new options.  This may make it easier for the teacher to detach the sense of loss and evaluate the strategies, lessons, or activities for what they are.  Questions like the ones below can be asked to help begin this process:

• If you had never seen this resource/strategy/lesson, how could you tell whether it would be more or less effective than other available options?
• Why did you previously use this resource/strategy/lesson?
• Why don’t you still use this resource/strategy/lesson?

 

Something that may also be a possibility is tying goods and services to goals.  Specifically, I know of a local school district that gives teachers their own class set of laptops/tablets as long as they continue to implement mutually set goals such as:

• using the technology on a weekly/biweekly/monthly/etc. basis
• attending ongoing professional development
• working with his or her district teacher specialists

Might the potential to lose access to the technology be a reasonable way to motivate teachers by leveraging loss aversion?  Does it seem too petty or punitive?  Could this be applied elsewhere?

 

I am struggling to find ways to incorporate this into working with students.  Some raw ideas I have include:

• What if we started the school year with an extremely easy task like getting a paper signed and returned?  We could then give them an A and then state something like, “Each of you who turned in the paper now have an A in this class.  This A is yours to lose.  If you work hard, you will continue to keep your A.”  Might this sense of having an A encourage students to work slightly harder to avoid losing it?
• Giving students free tutoring as long as they continue to meet certain minimum requirements such as turning in their homework or attending at least # times per week?

 

How else can we take loss aversion into consideration?  Are there opportunities for us to avoid it (like holding onto resources we don’t want to get rid of) or leverage it (like increasing the value of something by giving it up front so people don’t want it taken away)?