Wednesday, February 19, 2014

A simple way to reduce loss aversion

I am not sure if this is a coincidence or a strange alignment of the stars, but it seems that there have been a lot of UX related blog posts recently on the asymmetric dominance effect.  Some of the bloggers don’t seem to get it quite right, so I thought I would add to the discussion and hopefully provide some clarification in the process.

My favorite post on it is from Paul Olyslager’s blog, where he calls it the “decoy effect.”  It is true that the technique can be used to introduce a decoy into a product mix to push consumers towards one products or service over another.  But there is a more basic behavioral issue at work here, so I am not sure I would use a term that specific. It also sounds a little too pejorative for my taste.

But Paul’s example is a great one because of its simplicity, so I will use something similar (I hope you don’t mind Paul).  Imagine you have two external storage devices (e.g. a USB drive) that are identical except for the price and the storage space.   Both are the same brand, the same quality, the same physical size, the same color . . . .   The only difference is that

Model A gives you 20GB for $30. 
Model B gives you 30GB for $40

Which is better?  There is no clear answer.  It depends on whether the extra 10GB is worth $10 to you. What makes this a hard choice is that you can’t really know for sure.  You might find yourself stuck with a 22GB file wishing you had spent the extra $10.  But then again, maybe you won’t.  This creates cognitive difficulty in choosing, and this difficulty makes us less satisfied with the whole process.  There are three related contributors:

1.       In “choice paralysis” we kind of freeze up and don’t decide at all.  We tell ourselves that we are just putting off the decision, but we often never come back.
2.       In “anticipated regret” we are afraid of making the wrong choice.  This is similar to choice paralysis, except that we are able to make a choice in our heads.  We are just afraid to pull the trigger on the purchase.  Different emotion, but same effect – no purchase and dissatisfaction with the experience.
3.       In “buyer’s remorse” we make a purchase, but then we ruminate on whether we made the wrong choice and are less satisfied with the experience AND the product we ended up with. 

So we experience stress before choosing, after choosing but before purchasing, and after purchasing.  These are all worse for maximizers.

Where asymmetric dominance comes in is when we add in a third option.

Model A gives you 20GB for $30. 
Model B gives you 30GB for $40
Model C gives you 25GB for $45.

Clearly, C is not a very good deal.  Just comparing it to Model B makes this obvious.  It is more expensive and has less storage.  And remember – everything else is the same.  So why does the introduction of Model C matter?  We should just reject it and go back to the original decision I described above. 

But it is not so easy.  The mere presence of Model C changes the whole way we think about the set of options.  We know that Model C is worse than Model B, but not how it compares to Model A.  That 22GB file still messes up the ease of deciding.  Let’s look at what we know about the three options:

The only thing we really know for sure is that Model C is worse than Model B.  So the only way we can focus on avoiding a loss (I have posted about the importance of loss aversion many times, such as here and here) is picking Model B.  Model A could be worse than both Model B and Model C if that 22GB file ever comes up.  So the desire to avoid losses pushes us to focus on the one loss we can be sure we are avoiding.  And we pick Model B. 

Not everyone, but enough people to drive business decisions. More customers buy Model B, which is higher priced than Model A (and presumably higher profit).  And customers with strong loss aversion tendencies feel better about the purchase, so it can increase customer satisfaction as well.