4 Ways to Prevent Loss Aversion From Affecting Your Bottom Line
As a small business owner, you know the pressure to succeed can be… heavy. And because no one else can take responsibility for your business, that burden can feel both overwhelming and isolating — especially when you depend on your business to support your family and your livelihood.
I get it. With so much on the line, it can be easy to let fear take over when it comes time to make important business decisions. But ironically, this fear can actually prevent you from reaching the success you so desire.
As it turns out, there’s a name for this sense of fear in the world of business and finance: loss aversion. And while loss aversion may sound like it can keep your business safe, an unchecked loss-averse mindset can actually increase the likelihood that you’ll experience the very losses you hope to avoid.
Fortunately, there are things you can do to kick a loss-averse mindset to the curb. By addressing the role loss aversion plays in your decision-making, you can ensure that future choices in your business are made from a rational and confident mindset.
But First, What Exactly Is Loss Aversion?
Loss aversion means that you experience real or perceived losses more severely than the acquisition of real or perceived equivalent gains. In other words, your reaction to a loss would be disproportionately negative in comparison to your positive reaction to an equal gain.
For example, a loss-averse individual who loses $100 would be devastated, whereas if they gained $100, they wouldn’t feel a proportionate sense of joy or accomplishment. (And in case you’re wondering, most of us are naturally hardwired to experience loss aversion — we can thank evolution and biology for that.)
In business, loss aversion means that you favor decisions that help you avoid a loss over decisions that could lead to gains and increased profit. And unfortunately, loss aversion can deeply affect new (and seasoned!) business owners.
The Causes of Loss Aversion
Loss aversion can be attributed to a mixture of causes, including one’s neurological makeup, socioeconomic factors, and cultural background.
And remember, loss aversion affects nearly everyone — it’s simply a fact of life! But by recognizing the role loss aversion plays in our decision-making processes, we can take more control over our ability to make sound decisions based on logic.
Neurological Make-Up
The neurological makeup of our brains can greatly impact how we feel about losses. We’re all likely to experience varying degrees of loss aversion, but some people may be wired to experience loss aversion more severely than others.
If that’s you, simply recognizing how your neurological makeup plays a role in your reactions and decision-making can help you work on becoming less loss-averse.
Socioeconomic Factors
Where you stand in the socioeconomic hierarchy can also impact how loss-averse you may be.
For example, people in traditionally underprivileged positions, such as people of color, women, and immigrant populations, may experience a higher degree of loss aversion than people in traditionally more privileged positions.
An individual’s sense of personal agency and power within larger social and economic systems can play a huge role in whether they operate from a loss-averse mindset or not.
Cultural Background
Finally, your cultural background, including your ancestry, your hometown or home country, your racial and ethnic ties, your cultural values, and more can impact your relationship with loss aversion.
Generally speaking, individuals from collectivist cultures tend to be less loss-averse than individuals from individualist cultures. This is likely due to the fact that members of collectivist cultures feel a greater sense of community support from their peers, which can help to minimize the impact of taking financial risks.
How to Keep Loss Aversion In Check as a Business Owner
Ultimately, your brain, socioeconomic status, cultural background, and individual experience all impact how much loss aversion influences your decision-making in your business and your personal life.
But as a business owner, you want to do everything you can to make sure your company succeeds. And while a loss-aversion mindset may seem like it keeps your business safe, it can actually hold your business back from thriving and reaching its full potential.
After all, decisions made from a loss-averse mindset are usually based on panic or anxiety. Such decisions can aggravate the effects of a real loss or increase the likelihood that a potential loss will take place.
Fortunately, there are things you can do to help you move from a loss-averse mindset into a more balanced one. Below are a few ways you can push back on loss aversion and prevent it from affecting your bottom line.
1. Fully Consider the Net Positives
It’s human nature to consider the possibility of negative outcomes if an idea of yours doesn’t succeed. However, when you’re considering a new idea or taking your business in a new direction entirely, you need to allow yourself to fully imagine the net positives if your idea does succeed.
This will probably require a conscious effort. Start by writing down the net positives if your idea succeeds. Allow yourself to really feel the effects of those positive outcomes. It’s essential to practice feeling the potential impacts of positive outcomes — not just the negative ones.
2. Lower the Cost of Failure
Next, consider how you might be able to lower the cost of failure. Maybe instead of going for a big change all at once in your business, you make incremental changes.
For example, instead of paying to upgrade your website and implement a new social media strategy all in one month, perhaps you work with a website designer and start rebuilding your website over a couple of months to spread out the cost.
Once that’s done, you hire someone to manage a single social media channel for you and see how that works. If it succeeds, perhaps you have them manage more social media accounts.
By taking big ideas and breaking them down into smaller steps, you can measure and judge the success of each step and then decide if you want to continue forward with the project. This approach can be a great way to tackle a loss-averse mindset with compassion and validation.
3. Work to Increase the Likelihood of Success
Another way to keep loss aversion in check is by working to increase the likelihood of success. There are numerous ways to increase the chance of success of a new business idea. It all starts with making a plan.
For example, when implementing a change, you might make sure to develop a comprehensive plan of what you can do if something doesn’t unfold as expected.
4. Be Aware of Your Biases
Finally, it’s crucial to be aware of your biases — especially your financial biases — and the role those biases might play in your decision-making. Start by examining your money mindset to understand how your experiences with money, your feelings toward money, and your fears about money might influence any financial decisions you make.
Knowing your biases can help you be more aware of them when faced with business decisions. When you realize that it’s natural for you to want to avoid risks, you’re more able to analyze if there is true value in avoiding a specific risk or if pursuing it could make your business more successful.
It takes work to push back on loss aversion as a business owner. But being aware of loss aversion and your bias toward it is the first step to preventing loss aversion from holding your business back.
Allow Critical Thinking to Drive Your Decisions
When making important business decisions, consider the net positives if your idea succeeds, lower the cost of failure, and work to increase your likelihood of success. Allow critical thinking, innovation, and rationality to drive your business forward — not a fear of failure.
You can manage loss aversion by being aware that it exists and putting systems in place to help you make logical decisions. If you want your business to succeed, you’ll likely need to take some risks, and you need to be willing to push your business forward so that it continues to provide you with the freedom and income you’ve worked so hard for.
At Financial Fitness Coaching, we help you gain more objective perspectives about your business and the choices in front of you so you can make informed decisions with confidence. To see how we can help you push back on loss aversion in tangible ways, email me at kristen@financialfitnesscoaching.com or simply schedule a free 20-minute Discovery Call on my calendar.