Today, we delve into the cognitive bias of loss aversion, which I also spoke about in a recent video.

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Loss aversion is our tendency to fear and magnify losses more than we value gains. The prospect of loss - be it money, resources, or status - weighs heavily on our minds - much more heavily than any perceived gains.

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This cognitive bias has a cousin-the sunk cost fallacy. We are all prone to continuing to invest in a decision or project based on the ‘sunk’ resources (time, money and effort) already spent, as opposed to undertaking an objective analysis and potentially cutting our losses. The brain is a negatively wired survival driven phenomenon- we fear losses to the extent that we must consciously remind ourselves to be objective and evidence based.

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Strategies to address loss aversion and the sunk cost fallacy

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Before we outline the key strategies needed to address these cognitive biases, recognise that it starts with awareness - are you potentially amplifying perceived losses, or are you overly invested in a project of course of action that, on balance, lacks objective merit?

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More specifically as a negotiator:

• Be alive to the reality that concessions are invariably hard to obtain, and often take time and occur incrementally.
• Recognise in many negotiations that minimising potential losses matters more to your opponent than maximising gains. Therefore, in preparing for any negotiation think about the potential losses at stake from all relevant perspectives.
• Even in robust discussions, work to ensure your opponent and indeed all parties do not lose ‘face’ of perceived status. This is a loss that is felt acutely and requires each party to work hard to separate the issues from the personalities (agreed, not always easy when emotions run high).
• Recognise, say, in ongoing and long-term litigation, that the (sunk) costs already incurred may be a barrier to resolution. Focus therefore on the merits of an effective resolution which (although may be less than ideal from any perspective) works as an effective ‘stop/loss’.
  

As a leader:

• ‍‍Again, in any business negotiation, think about what your counterpart is afraid of losing and focus on structuring a deal which minimises these losses.
• Aware of the sunk cost bias in decision making, reframe your analysis and that of your team to focus on future outcomes. The appropriate question needs to be - what is the best decision going forward, not what do I need to recover these losses? In undertaking this exercise, also weigh up opportunity costs inherent in continuing down the same path.
• Implement a decision-making framework that promotes objectivity - seek out data which can be interrogated.
• Create exit strategies from the outset at an agreed parameter - traders, for example, often have a clear ‘stop/loss’ policy to offset this bias.
• Embrace flexibility as a mindset- sure no one likes to confront losses, but the old adage of ‘short term pain, long(er) term gain’ comes to mind.