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Archive for March, 2012

Would it surprise you to hear that in 1977 the head of safety and pilot for KLM airlines, a Capt. Van Zanten, became so concerned with mandatory rest periods for himself and other pilots even when finding his plane stranded at Tenerife airfield (after being diverted to the airport due to a terrorist bomb explosion) went against his own safety protocols because he was determined to save time?

When the stranded plane got word that they had clearance to proceed to their destination they were already in the middle of a “time-saving” refueling and could not interrupt the 35 minute process, further frustrating Van Zanten.  While the refueling completed, a thick blanket of fog began descending on the runway with a worsening visibility of 300 meters.  Fog descending, Van Zanten was ready to take off before an overnight stay on the island became unavoidable which would serve to further delay the aircraft.  Van Zanten revved up the engines while his copilot nervously noted they did not have clearance from the tower to take off.  Taking off anyway, Van Zanten sped down the runway, the plane’s fuselage ripping through the top of PanAm plane parked on the runway that was hidden by fog.  Van Zanten, his entire crew and all his passengers were killed in the crash.  584 people lost their lives that day.

Afterward, investigators at the airfield realized that the fog contributed to the tragedy but they also concluded that Captain Van Zanten was irrationally frustrated and rushed to irresponsible action.  The Captain seemed to have experienced an irrational overreaction to a perceived loss of time.  This example illustrates how our aversion to loss plays out in our own decision making.

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Think about when you rent a car, they push extra insurance coverage called “loss damage waiver”.  Who doesn’t want a waiver for potential loss?!  Many people are quick to want to shell out money that will cover something bad that might possibly happen.  We often opt for the coverage, you know, “just in case”.  This coverage is typically actually redundant in nature (!) since our own car insurance would automatically cover us should anything go wrong during the rental of the vehicle.  But we will take out an extra policy at an astronomical rate just to be doubly safe… paying for this helps us feel we are better avoiding loss.

The losses Van Zanten was trying to avoid were all downsides of the mandated rest period:  the cost of housing customers in nearby hotels, the chain reaction of delayed flights and, of course, the black mark on his shiny reputation for being on time.  Ori and Rom Brafman, authors of Sway:  The Irresistable Pull of Irrational Behavior, studied the Tenerife airfield case and cite that Van Zanten’s desire to avoid a delay started out innocently enough.  “At first he simply wanted to keep passengers on board to save time.   But as the delay grew longer, the potential loss loomed larger.  By the time an overnight delay seemed almost inevitable, Van Zanten was so focused on avoiding it that he tuned out all other considerations and, for that matter, his common sense and years of training.” 

What we can learn here is, “the more meaningful a potential loss is, the more loss averse we become.  In other words, the more there is on the line, the easier it is to get swept into an irrational decision.”  Just like Captain Van Zanten did on that runway back in ’77.  Adding to his irrational decision was the force of commitment to his plan to take off that night no matter what.  The authors of Sway emphasize that—when loss aversion is combined with commitment to an idea or course of action—the force becomes an even more powerful influence in shaping our thinking and decision making.  They point out that “our natural tendency to avoid the pain of loss is most likely to distort our thinking when we place too much importance on short-term goals.  When we adopt the long view, on the other hand, immediate potential losses don’t seem as menacing.”

We can see these irrational pulls in our thinking present in more every day matters as well.  Take eggs.  Yes, eggs.  Studies show that when the price of eggs goes up at the grocery store, even just a little bit, people react by buying 2 ½ times fewer eggs!  That’s quite a reaction to slight price increase.  Rom and Ori Brafman would argue a distinctly irrational reaction.  Another compelling example comes from a Harvard Business School Negotiations course.  Shared in Sway, Professor Bazerman introduces his “twenty-dollar auction” on the first day of class.  It begins with Bazerman holding a twenty-dollar bill in the air and offering it up for auction.  Anyone is free to bid in $1 increments and an understanding that the runner-up still honor his or her bid.  The bidding starts out fast and furious until reaching the $12-$16 range.  It’s at that point that people realize everyone has the same idea and suddenly it’s down to the 2 highest bidders.  Typically the highest bids are $17 and $16.  The $16 bidder realizes she (or he) must bid $18 or suffer a loss.

Now here it is again, the loss aversion irrational thinking…

Back to the twenty dollar auction, at the $18 mark, suddenly the goal shifted from looking to make a quick buck to not wanting to be the sucker who paid good money for nothing.  Now each bidder is merely playing not to lose.  Bazerman shares that at this point bidding becomes like a runaway train, with bidding going up past $21, the rest of the class going crazy with laughter at the audacity of the situation.  The Brafmans note that

“From a rational perspective, the obvious decision would be for the bidders to accept their losses and stop the auction before it spins even further out of control.  But that’s easier said than done.  Students are pulled by both the momentum of the auction and the looming loss if they back down—a loss that is growing greater by the bid.  The two forces, in turn, feed off each other:  commitment to a chosen path inspires additional bids, driving the price up, making the potential loss loom even larger.  So students continue bidding:  $21, $22, $23, $50, $100, up to a record $204”…!

Professor Bazerman reports that over the years that he has conducted the auction experiment he has never lost a penny and always donates the proceeds to charity.  The deeper the participants in the auction dig themselves into a hole, the more they continue to dig.

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Clearly, the sway of irrational thinking—namely loss aversion paired with commitment—affects most of us at some point and can be quite damaging.

The Brafmans, authors of Sway , have this to share regarding a kind of antidote to irrational thinking:

“Having a long-term plan–and not casting it aside–is the key to dealing with our fear of loss… Our natural tendency to avoid the pain of loss is most likely to distort our thinking when we place too much importance on short-term goals.  If looking far into the future is the way to avoid the faulty decision making that can result from loss aversion, the antidote to getting swept up in commitment—the force that keeps us from giving up on a project even though it’s clearly failing—is to don Zen Buddhist glasses and learn to let go of the past.”

I would add that it’s not just about future or past-orientation in our thinking but about being willing to let go of our perceptions in the moment, our expectations that are driving behavior in negative directions when not examined.  Practicing letting go of being in control would also help break the cycle of irrationality.

Being afraid of loss—and acting to avoid it—is normal, yes.  But is it actually more damaging sometimes?  I see an aversion to loss as a Big Bad Wolf to sitting with ambiguity.  Sometimes we are letting fear, rather than hope, drive the bus in our lives.  There are times when risking loss should be given another look, another try because the gains could out-way the losses.  In the case of Van Zanten if he’d risked losing time he would have gained being alive.

Being averse to loss is also often a way of being averse to uncertainty and ambiguity.  When we are less defensive about the possibility of loss and little more open to making room to risk a gain I think it tends to be a healthier, more well-rounded decision.  It reminds me of the discussion we had a few months ago about the counter-intuitive magic of Failure Club.

There’s a LOT of research out there about loss aversion and risk aversion biases out there, here’s a link to read more.  Keep in mind that loss aversion is a type of cognitive bias, many of which are unhealthy and need our attention and modification in order for us to be our healthiest selves.

current music faves:  the national, madonna, pixies

current show faves:  walking dead, the river, snl

breakfast today: home-made soy chorizo scramble skillets

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