Loss aversion and change management


Commenting on my post An Unsettling Truth about Data Governance, Ken O’Connor shared a great quote by Ronald Heifetz:

“People do not fear change, they fear loss.”

This quote reminded me of loss aversion, which is a term from behavioral economics for a cognitive bias where people are more affected by a potential loss than they are by a gain of equal value.

For example, the prospect of a double-or-nothing investment or gamble typically makes many people choose to avoid the risk of losing the money they already have. Of course, the amount of money invested or wagered will affect the decision since most people would be far more comfortable with risking $1 to win $1 than they would be with risking $1,000 to win $1,000.

But things get even more complicated when the potential gain is more than the equivalent loss.

In his research into weighing the psychological benefit of winning against the psychological cost of losing, Daniel Kahneman found that most people have a loss aversion ratio in the range of 1.5 to 2.5, meaning that in order to be willing to risk a $100 loss, most people needed a potential gain between $150 and $250. In other words, most people need to be convinced that they have more to gain than lose before they are willing to change the amount of money already in their possession.

Loss aversion is actually a common obstacle to changes of any kind, and the change management efforts of data governance need to take this into consideration. Even though it sounds counter-intuitive, people even fear losing something that they know they should change, such as outdated technology, ineffective data management procedures or inefficient business processes.

Fear of losing the comfort of the familiar — even when the familiar isn’t all that comfortable — is the biggest obstacle for change management efforts to overcome since, as William Shakespeare said, often we would “rather bear those ills we have than fly to others that we know not of.”

So, the next time you encounter change resistance, examine what losses your resistors are afraid of, as well as what gains your changes are proposing. The loss aversion ratio might not need to be in the range of 1.5 to 2.5, but a perceived ratio of 1.0 or less will only increase change resistance.


About Author

Jim Harris

Blogger-in-Chief at Obsessive-Compulsive Data Quality (OCDQ)

Jim Harris is a recognized data quality thought leader with 25 years of enterprise data management industry experience. Jim is an independent consultant, speaker, and freelance writer. Jim is the Blogger-in-Chief at Obsessive-Compulsive Data Quality, an independent blog offering a vendor-neutral perspective on data quality and its related disciplines, including data governance, master data management, and business intelligence.

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