Anomalies

Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias”
Daniel Kahneman, Jack L. Knetsch, and Richard H. Thaler, in Journal of Economic Perspectives, Winter 1991
Read October 2010

Daniel Kahneman and Amos Tversky are famous for their research in decision sciences on heuristics and biases—that is, ways that people make decisions, which are often not based on rational methods. One of their most ground-breaking theories is called Prospect Theory. Its basic premise is that we evaluate choices as gains or losses relative to a certain reference point. In other words, we do not have stable preferences, as was previously believed by decision theorists. Instead, our preferences depend on our current situation.

Unstable preferences can lead to other biases, and some of these are outlined by Kahneman et al. in this paper. The authors begin by describing the endowment effect; basically,

“people often demand much more to give up an object than they would be willing to pay to acquire it” (194).

This bias has been demonstrated in many research studies. For example, in one study, participants who received mugs demanded much more money to give them up than those without mugs were willing to pay. More relevant to my thesis topic, the authors point out that the endowment effect can also apply to non-tangible items, such as having clean air or water. That is, people who already have clean air would demand outrageous amounts of money to give it up; while those that do not have clean air are unwilling to pay nearly as much to obtain it.

The endowment affect also directly leads to the next bias, which the authors call loss aversion. Because of loss aversion,

“…changes that make things worse (losses) loom larger than improvements or gains” (199).

Why is this important? Environmental psychologists have realized that the way an issue is framed can influence whether it is perceived as a loss or a gain, and can thus influence a person’s behavior. For example, Gardner and Stern, in Environmental Problems and Human Behavior, suggest referring to energy “efficiency” instead of “conservation” (85). They cite a study which showed that individuals who were told how much money they would lose by not insulating their water heaters were more willing to take action than those told how much money they would save by performing the same action. Framing is a powerful tool that can be used by communication designers, but only if they are aware of what to emphasize through the use of framing techniques.

Finally, Kahneman et al. describe the status quo bias, which stems directly from loss aversion:

“individuals have a strong tendency to remain at the status quo, because the disadvantages of leaving it loom larger than advantages” (197-198).

This principle has been demonstrated in experiments regarding investments and organ donation defaults, 
for example, but it also has implications for behavior change attempts.
Because of the status quo bias, designers must realize that asking people to perform a completely new action is an extremely tall order. In our designs, we must incorporate ways to make leaving the status quo easier.

BJ Fogg’s Behavior Grid (www.behaviorgrid.org) is a good example of showing how to do this: by first focusing on one-time behaviors, then behaviors that last for a set duration, and finally on permanent change. Similarly, tying a new behavior to a familiar behavior, is easier than asking audiences to perform a completely new behavior (this could also relate to working within people’s existing schemas). Design interventions can utilize principles like the status quo bias to help individuals achieve change in gradual steps.

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