Loss Aversion in Business Simulations

Research has found that people hate losses almost twice as much as they enjoy equal gains[3]. This is called the loss aversion principle. The loss aversion principle states that people’s “response to losses is stronger than the response to corresponding gains”. It was first identified in 1979 by the Psychologist and Economist Daniel Kahneman and his collaborator Amos Tversky.

We have noticed the loss aversion principle at play during our business simulation courses. At PriSim courses, participants are divided into separate management teams. Each team runs their own company (insurance brokerage, manufacturing, aerospace, dealership, etc.). Their challenge is to manage and improve a business for several simulated years in a competitive marketplace. The management team that runs the “best” company over several simulated years of competition wins! However, there are teams that do not win, and some end with negative profitability. As the loss aversion principle states, losing is never fun for participants. However, we have observed that participants’ morale is hit the hardest not only when losing but by ending with negative profitability. For some reason, starting with $500,000 in profits and ending with -$250,000 feels worse than starting at $1MM profits and ending with $250,000. In both scenarios, teams are losing the same amount of money but in our experience, there seems to be a bigger psychological impact ending in the negative.

The competitive aspect of a business simulation is a huge strength when teaching as it keeps participants engaged thus enhancing the learning. However, if participants focus too much on the competition, like when they end with negative profitability, they can miss out on the learning.

To avoid the downside of the competitive aspect of business simulations we have “shifted up” the starting profitability of our simulations. A simple change with a powerful impact in helping us keep participants focused on the learnings from the course.

[1] Source: https://upload.wikimedia.org/wikipedia/commons/8/85/Loss_Aversion.png

[2] Source: https://creativecommons.org/licenses/by-sa/4.0/deed.en

[3] Sources: https://en.wikipedia.org/wiki/Loss_aversion; https://scholar.princeton.edu/sites/default/files/kahneman/files/anomalies_dk_jlk_rht_1991.pdf