When the Fear of Loss is Driving and What To Do About It

We are all human, and that means we have a tendency to avoid loss at the expense acquiring equivalent or even greater gains. It’s called “loss aversion” and when it sneaks into the driver seat of our decision-making it can be hard to get your hands back on the wheel.

That’s not to say loss aversion is always bad and should never influence your decisions. Excessive loss aversion, however, can lead to missed opportunities, stagnation, and worse.

So how can we, as leaders, know when loss aversion has been taken too far?

Negative Framing

Negative framing is often the first step down the path of putting loss aversion in the driver’s seat. If you find yourself consistently focusing on what could go wrong with a lack of emphasis on what could go right, it’s easy to create an unbalanced view of your options. This leads to

• Unhealthy risk avoidance
• Decision paralysis
• Reduced innovation
• Lower motivation
• A pessimistic culture

Our perspective drives our views and behaviors. Negative framing will drag you down where a more balance perspective will help move you forward.

Spend some time either daily or weekly auditing your decision making and ask yourself if you’ve given a fair amount of airtime to both sides of an issue. Note, not equal airtime, but a fair amount of time to each. Look for trends and triggers in your decision making that lead to an over emphasis on the negative and develop coping strategies.

Fear of Feedback

The next earliest sign of loss aversion could be the fear of feedback. When you find yourself, your team, or your organization avoiding actively seeking feedback or criticism, misinterpreting constructive feedback, or resisting changes based on feedback it’s time to start digging in.

This avoidance of feedback is a sign that there is a resistance to change and by extension improvement. If this goes on long enough, you will see stagnation, increased blind spots, and missed opportunities.

Thankfully, the path forward is easy, just rip the band aid off and start soliciting feedback. Take the time to thoroughly examine and internalize the input with a curious mindset and take action immediately. This is an “eat the frog” moment that will not be as bad as you fear.

Risk Avoidance

Avoiding risk is necessary to some degree, but the reality is that true success requires an element of risk and usually a risk bigger than most are comfortable with. Risk avoidance may be showing up for you or your team in a few ways:

• Fear of failure
• Reluctance to try something new
• Excessive reliance on past success or what has worked in the past
• Conservative investments in resources
• Procrastination
• Decision paralysis or constantly revisiting decisions

All of these are signs that you and/or your organization are struggling with effectively managing risk. This leads to missed opportunities, low innovation and growth, reduced productivity, and more.

To shift the mindset here it’s important to focus on making failure safer (i.e. psychological safety) and celebrating learnings rather than losses.

What to do about Loss Aversion

If you find yourself struggling with loss aversion, there are concrete actions you can take that will help.

1. Reframe Decisions:

• Approach: Focus on potential gains as well as the risks. Consider what you stand to gain from taking action rather than only what you might lose.
• Action: Use positive but realistic language and scenarios when discussing options and potential outcomes.

2. Set Clear Goals and Metrics:

• Approach: Establish clear, measurable goals to guide decision-making. Focus on long-term objectives rather than only or primarily short-term losses.
• Action: Develop a balanced scorecard that includes risk assessments alongside potential benefits.

3. Create Psychological Safety:

• Approach: Foster a culture that views mistakes and failures as learning opportunities.
• Action: Share stories of how past failures have led to success and encourage experimentation and innovation.

4. Diversify Decision-Making:

• Approach: Involve a diverse group of stakeholders in decision-making to balance risk-averse tendencies with more risk-tolerant perspectives.
• Action: Create cross-functional teams for major decisions to ensure a variety of viewpoints are considered.

5. Practice Incrementalism:

• Approach: Break down large decisions into smaller, manageable steps that allow for gradual progress and adjustment.
• Action: Implement pilot programs or small-scale tests before committing to large-scale changes.

6. Seek External Feedback:

• Approach: Get an outside perspective to challenge your assumptions and biases.
• Action: Hire consultants or advisors, or engage with peer networks and industry groups.

7. Regularly Review Decisions:

• Approach: Establish a routine to review past decisions and their outcomes to learn from both successes and failures.
• Action: Conduct regular post-mortem analyses and adjust your decision-making frameworks based on the insights gained.

By recognizing the signs of excessive loss aversion and implementing strategies to mitigate its effects, you can make more balanced, forward-thinking decisions that drive growth and innovation.