Guest Contributor: Neil Boss, Principal, Boss Management Consulting
Neil is a former nonprofit COO and currently advises nonprofits and small business on how to navigate growth.
Innovators often believe that everyone weighs gains and losses the same. We expect everyone around us will take risks and wants the organization to be cutting edge. We say it enough that we even think it is true. However, the reality is more like what we see in Misbehaving[1] by Richard Thaler.
Thaler asked twenty-three executives, in a room with their CEO, if each of them would take an investment that had a fifty percent chance to gain $2M and a fifty percent chance to lose $1M. The average net gain would be $500,000.
The CEO was asked, if these projects were independent, how many of them would he choose. He chose all of them, a net profit of $11.5M.
However, of the twenty-three executives, only three said they would pursue the individual investment. A net profit of $1.5M.
For the executives, the people whose fates are tied to the individual outcomes, the loss is factored more heavily than the gain. They expect a reward if they gain the organization $2M, and they expect a consequence if they lose the organization $1M. For twenty individuals the consequence outweighed the reward.
Those twenty individuals were practicing loss aversion, the tendency to weigh losses higher than gains in organizational decision-making.
As innovators, we cannot afford to work with people practicing loss aversion, but we often create and enforce the situation through our organization’s culture.
We give autonomy to our stakeholders by asking them to take risks that will sometimes result in a loss. With the luxury of hindsight we believe that we would have made a different choice and then expect these stakeholders to change based on that belief. We continue saying we want risks; however, the lesson has been taught. Next time it is safer for our stakeholders to make a less risky decision.
When innovators choose to go with a software as a service we are looking for transformation for our organization. However, our organization will not be transformed if our stakeholders are making safe decisions that stem from loss aversion. Deciding to undergo this level of change needs commitment and the ability to step out of the organization’s comfort zone.
In this post, J. Neil Boss, Principal and Lead Business Solution at Boss Consulting describes ways to make loss aversion a part of the conversation, raise awareness around the flight to safety, and help assure organizational transformation.
Create a Safe Place to Talk About Losses
If the only conversation is about the gains, the goals, and the expectations, then there are hidden loss averse stakeholders. This is the time for questions and for listening. If a culture of loss aversion exists it is because we put it there.
Ask the people involved in the project about their losses from decisions in the past. Ask for specific examples. Discover if they felt punished, isolated, or that the narrative was disproportionate to the outcome. Ask in large groups, small groups, and one-on-one sessions. Individual answers will vary depending on the environment.
Define the Gains and Losses While they are Still Abstract
Spend a fair amount of time talking about what both success and failure looks like. These two areas can be defined as the gains and losses for the project. Once they are defined, create a visual and place them on a spectrum.
What risks are we willing to take to reach our goal of transformational change? There are no right or wrong answers, the conversation itself is the solution because it is creating an understanding.
Define the Rewards and Consequences
What are the corresponding rewards and consequences involved with those gains and losses. It is not good enough to state that better organizational outcomes will translate into better individual outcomes. We do not get to decide that for individual decision-makers.
Address the Informal Decision Makers
If a stakeholder is able to deliver feedback, question the outcomes of decisions (hindsight bias), gain influence in the project, and have no resulting rewards or consequences associated with the project, then the culture of loss aversion will persist.
In this culture the decision-makers in the project will take the safer approach by incorporating the feedback of the informal decision-makers, and in doing so will be prone to making safer choices. Avoid this by making sure all stakeholders are formally acknowledged.
Be on the Lookout for Status Quo Statements
“Our constituents will not like that” | “It doesn’t work like that” | “We do not have the budget for that”
These statements come from a good place, they are however, rooted in the current system and can move us towards the status quo, or to safety. Use these statements to go back to the beginning and try to understand why they are being said.
If we do not use these statements to create that conversation then we should expect the safe decisions to persist.
Recognize the Flight to Safety
Deciding to use a software as a service is a direction we take when looking to transform our organization. While making safe decisions is generally a good thing, we should expect our software to mirror that safety if loss averse decisions are being made. If the narrative is one of transformation then we should want the incentives and execution to match that narrative. People are not doing anything wrong in making loss averse decisions, they are just being humans, and the best way to get a common understanding with humans is to talk it out.
Summary + Conclusion
Innovators are in a position to create conversations that lead to everyone in an organization taking the risks we want and recognizing the flight to safety. As leaders of this conversation, we have the ability to change the culture of loss aversion and make sure we actually implement transformation in our organizations.
[1] Thaler, Richard. Misbehaving – The Making of Behavioral Economics. 2015. W.W. Norton & Company