Losses Loom Larger...

Do you care more about losing a dollar or gaining a dollar? If you are like most of us, losing that dollar will make you more upset than gaining that dollar will make you happy. So, you probably care more about losing a dollar. This phenomenon is known as loss aversion, or the tendency to strongly prefer avoiding losses to acquiring gains. In fact, research suggests that our emotional reaction to a loss is about twice as intense as our joy at a comparable gain.

I have seen this behavioral economic theory play out in many venues. Most recently, I found myself using it to explain why a nonprofit organization with whom Wellspring was working chose not to pursue what, by all practical measures, seemed to be an attractive merger. In this recent project, our client was looking at options for a merger with a specific partner, a much larger organization in the same field that could offer – amongst other things – financial stability.

We went through the necessary diligence process to test the attractiveness of the merger, and, after a series of meetings, both leadership teams decided that there was strong alignment and identified significant opportunities for programmatic synergies. It just seemed to work.

So why didn’t it?

In the last meeting, there was a clear sense that our client was struggling with a looming sense of loss. Though the leaders saw the benefits that a merger with this partner could bring to the field overall, as well as to this organization’s financial situation, our client could not get over the loss it would feel if its brand, programs, people and/or leadership position in the field were possibly lost, or, more likely, transformed by the merged organization.

So, despite the partner’s best efforts to assure our client that its legacy would continue, the merger did not happen.

Clearly, there were a variety of factors that led to this “no-go” outcome. However, I do believe that our client’s looming sense of loss was a key contributing factor. The potential gains were clear: financial stability and exciting program synergies that would lead to greater impact. However, those were outweighed in our client’s mind by the even more powerful potential losses, especially the brand as standalone.

Ultimately, the decision not to merge may have been the right one for a host of reasons. Having said this, it is not surprising that our client focused more of its attention on the potential losses as opposed to the potential gains. We should recognize that, while we are all subject to these behavioral biases, it may be helpful to work through them by approaching our decisions with analytic rigor and, when appropriate, an outside perspective.