It is said that the human brain fears the pain of a loss twice as much as it craves the pleasure of a win.
The irony of course is that if we’re not able to power through that pain, we’ll never realize the pleasure of success on the other side.
In fact, it’s not just a saying, it’s well documented fact. Myriad studies in behavioral economics and other fields have proven time and time again that LOSS AVERSION IS REAL (see references 1-3 below). Although it stands to reason when we think about it as business owners, we often find ourselves clinging to our own old, outdated, and frankly bad business decisions — simply because we do not want to feel the pain of loss.
Understanding the existence of these forces — and yes most of them are common sense — will be key to understanding your market and how to establish your microbusiness in it. I’ll talk more in another post about the differences in evaluation between “small” and “micro” business settings, because there are some key changes in mindset that need to be discussed.
The differences for the owners of micro-businesses are profound, however, when compared to our “small” business counterparts. Since “small” businesses can in fact be huge and still count as small businesses in the eyes of the government, it is important to draw the distinction between “small” and “micro”. When I refer to micro-businesses, I’m thinking about my friends who own a coffee shop on the other side of town with two employees and an advertising budget of $500. I’m thinking about the bicycle shop I own with annual revenues between $100k-$250k and six (mostly part time) employees. We micro-businesses have the ability to do what “small” businesses often don’t: implement immediate change.
I’m not talking about implementing some sort of phased quality improvement study, nor am I referring to hiring an outside firm to evaluate us and offer a change management consulting plan – mostly because there’s no way we could afford those luxuries. Sure, there is a formal process for this – in the “real” business world it’s called refinement through feedback loops and upkeep through management controls. Make no mistake though: ours are real businesses, too.
“The process of ruthless, objective evaluation of ones own business and marketing strategies is difficult task – especially if it results in the realization that those strategies are not yielding the intended levels of success. As a business owner, one must be willing and able to accept feedback – whether internal or external – and take responsibility and action when data show that changes need to be made. Those who are unable or unwilling to do so will find themselves with failing businesses, dragged down by out-of-touch strategies and mired in inaccurate assumptions.”
That paragraph was from a paper I wrote during my MBA program. I was still running my bike shop, albeit in an even smaller format, and if memory serves I had received some negative feedback from a few customers that month. I’ll have to write about that another time – some of our best chances for change come in the form of negative feedback, we just have to get over the feeling of being personally attacked.
To close, I’ll restate the original point: We all make mistakes. The real mistake is failure to realize – and react – when we’ve made one. To do that, we’ve got to remember that it’s okay to feel uncomfortable about the idea of losing the good idea or strategy we had. Even when we know that we need to change, it can still be difficult TO change – because of loss aversion. Often that means we only take action when that 2:1 threshold is exceeded – but that’s often not the reality. When was the last time you had an idea, put it in to action, realized it wasn’t working, and came up with a new idea that was TWO TIMES BETTER? Me either.
Even if we’re not sure of the best way to overcome the loss we know we need to take by changing a strategy or discontinuing a program, we still need to do something. Sometimes the best answer simply taking a step backward to square one by removing the offending program entirely and not replacing it with anything whatsoever. In this way we are free to re-evaluate our ideas without continuing to experience the loss to which we REALLY need to be averse — the loss of time, resources, and revenue that results from hanging on to a bad idea too long.
- Hendricks, K. (2018, September 14). What causes loss aversion? Retrieved January 12, 2022, from https://kenthendricks.com/loss-aversion/
- Inesi, M. (2010). “Power and Loss aversion.” Organizational Behavior and Human Decision Processes, 112, 58–69
- Wang, M., Rieger, M., and Hens, T. (2017). “The impact of culture on loss aversion.” Journal of Behavioral Decision Making 30(2), 270–281.