What Have You Got to Lose?

When was the last time you talked about embarking on a new venture and someone retorted: “but what have you got to lose?” In most cases, your answer might be “a lot”. That’s because our brains are hardwired to consider the negative consequences before all else. Why? It keeps the lizard brain safe. If we remember negative or traumatic experiences vividly, we lower our chances of repeating them.

Given the negative stuff always pops up first, it’s unsurprising that in the “what have you got to lose” scenario, the fear of losing something bears more weight than the exciting potential of gaining something else.

This is loss aversion. It was first identified by Amos Tversky and his associate, Daniel Kahneman, in 1979. They found that because people react differently to positive and negative changes, the pain of a loss is twice as powerful as the pleasure of a gain. As a result, humans tend to prefer avoiding losses to acquiring equivalent gains. That’s why we stash money under mattresses, find it hard to share our favourite foods and willingly ‘cut off our noses to spite our faces’ at many an opportunity.

Entertainment, from board games to TV gameshows, turns loss aversion to its advantage. If you’ve ever played Monopoly, you’ll know that causing a fellow player to sell their hotel is a thrill, buying the hotel they can’t afford to keep is an even bigger thrill and them taking back said hotel from you is the most gut-wrenching feeling of all.

Loss aversion or risk aversion?

Risk aversion means valuing gains and losses equally, whereas loss aversion means we value losses more than gains.

We talk a lot about risk aversion in entrepreneurship. But should we actually be talking more about loss aversion? Rather than fearing the risks associated with starting our own venture, many of us are deterred by the immediate loss of financial security, and give that much greater weight than the potential rewards.

The more we earn and the more comfortable our existence becomes, the greater the loss aversion we feel at the thought of quitting our jobs and starting off on our own. In many ways, graduating from University and moving straight into entrepreneurship stings the least.

Loss aversion in entrepreneurship

Loss aversion accompanies us every step of the way when we build something new.

Shielding the Idea

It starts with our precious idea. Our natural instinct is to hug it close and avoid sharing it with others at every opportunity. We channel our inner Gollum, telling ourselves that if we share it with others, they will steal it for themselves.

Whilst rare scenarios exist where the person you tell is in a position to be able to execute on your idea immediately and with relative ease, 99% of the time, keeping it to yourself means you miss out on hearing useful feedback that will save you precious time and enrich your output.

The alternative? Acknowledge your fears and list the people or companies who could immediately execute on your idea. Perhaps they have existing technology in the space, are set up to move faster or have already created a similar solution. Avoid that list and share your idea at a conceptual level (no need to dig into details) with anyone else who will listen. What intrigues them? What risks do they see?

Protecting the Product

Once we turn our idea into an early stage product, loss aversion strikes again. Our attachment has grown from an idea to a physical ‘thing’. Whilst our early users give us useful feedback, we cling to the positives and are afraid to act on the negatives, for fear of killing the precious thing we’ve created.

At this juncture, breaking and building from scratch is a necessary step that takes untold courage. If it feels uncomfortable, do it often. Regularly work with your team in sessions deliberately designed to break and rebuild the solution. This might mean tackling one part at a time to evaluate exactly what works and what doesn’t, using the customer feedback as your guide. This leaves us attached to the vision, but unafraid to see the execution change as we move forward.

Collecting Customers

As we build our customer base too, we are victims of loss aversion. Founder Brian Scordato writes for Fast Company on how he realised loss aversion was controlling his marketing strategy. Focused on the fear of losing subscribers from his email database, he overthought his messaging, told himself his work wasn’t good enough and sent fewer newsletter editions as a result.

He describes how he’s not alone and has seen companies collect pre-launch emails from customers only to avoid ‘bothering them’ until the product is ready, by which time they’ve long forgotten and the relationship cannot be salvaged.

Instead, he suggests thinking of customer behaviour beyond your control as “data points”. An unsubscribe or two teaches you more about who your customers are and what they enjoy than a perfectly preserved customer list you never contact. Removing the emotion to refocus on the data calms our instinct to focus on what we have to lose and switches our attention to what we stand to gain.

Maintaining Life Support

Just as there’s never a right time to start a business, there’s never a right time to end it, either. Quickly identifying when to pivot or pull the plug in spite of significant investments in money and time is another battle with loss aversion: the familiar sunk cost fallacy. Fear of what we have to lose in the moment of change causes many of us to delay or to bury our head in the sand in the hopes the problems will fix themselves. As a result, many entrepreneurs are left shovelling coal long after the fire’s gone out.

The best alternative — keep things objective by identifying dealbreaker assumptions upfront. If you find data that disproves one of your dealbreakers, perhaps “customers don’t want it” or “we can’t make a profit”, the decision to pivot or pull it becomes hard to ignore because it’s clear there’s less to lose.

Using loss aversion to our advantage

There are ways we can take advantage of loss aversion. We know that for many, moving from a corporate environment to a startup sparks loss aversion due to lack of financial security. Offering a share in the business’s future success not only helps to counterbalance the initial instability with the promise of much larger rewards, but also builds commitment. Once you’re in, your incentives are aligned with the future success of the business and you might feel you have significant value to lose by walking away.

Similarly, keeping an eye on competitors can leverage our tendencies towards loss aversion for the better. Jeff Bezos reminds us that Amazon watches their competitors at every move: “We watch our competitors, learn from them, see the things that they are doing for customers and copy those things as much as we can”. Call it ‘fear of missing out’, call it ‘keeping up with the Joneses’ but it’s all a form of loss aversion: a fear of losing your edge to somebody else.

Once we know loss aversion affects us in everything we do, it’s easier to confront it and use its effects to move us forward, not back.

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