Loss aversion in salespeople: do we play to win or not to lose?
Bazerman's $20 bill auction shows why we keep pushing deals that are already compromised, and how that habit distorts sales forecasts.
by Alberto Viotto · Published · Updated
Professor Max H. Bazerman teaches a negotiation course at Harvard Business School. He opens the first day of every course the same way: he takes a $20 bill and puts it up for auction. There are just two simple rules:
1) bids must be made in increments of $1
2) the runner-up must still pay their last bid, getting nothing in return
The bidding begins, and slowly all the participants but two drop out (at around $18); the two who remain know that the loser will have to pay and get nothing, and they keep bidding.
At this point the strategy of the two is no longer aimed at winning, but at escaping defeat (behavioral economics – loss aversion https://en.wikipedia.org/wiki/Loss_aversion). Studies on the psychological value of losses and gains have identified a loss aversion ratio of around 2. This means that the motivation to avoid a loss is about twice as strong as the motivation to pursue a gain. A recent meta-analysis of 607 estimates drawn from 150 articles (Brown, Imai, Vieider and Camerer, 2024) puts the mean loss aversion coefficient at 1.955, within this range.
Bazerman has repeated this game many times, and the $20 bill has never sold for less than its value, in some cases reaching substantial sums (over $200). The rules are those of the “dollar auction” described by Shubik (1971), in which the second-highest bidder also pays their bid: a paradox of escalation in noncooperative behavior.
The mechanism is known as escalation of commitment: the more we have invested, the harder it is to stop. It is a relative of the “winner’s curse,” which occurs when the winner of a contest discovers that they have paid too much for an asset of uncertain value (Bazerman and Samuelson, “I Won the Auction But Don’t Want the Prize,” Journal of Conflict Resolution, 1983).
Anyone who works in sales, especially when the product or service is complex and the sales cycle is long, often ends up in this situation. To achieve the expected results, a salesperson has to manage their time. The more time and effort they have devoted to a given sales cycle, the stronger their motivation and emotional involvement will be. In the organizational literature the phenomenon has been studied for decades under the name escalation of commitment; one meta-analysis reviews its many determinants (Sleesman, Conlon, McNamara and Miles, 2012). This process consequently leads to overestimating the probability of success and downplaying the risks, and there are three possible outcomes:
1) a sale: at the cost of margins and time, accepting and concealing any risks.
2) a lost deal, with little chance of recovering the material and emotional investment.
3) an endless cycle (the worst case): unable to accept the loss, the salesperson feeds the illusion that the opportunity is still alive.
The more involved the person is, the harder it will be for them to realize it; pressure and emotion increase the risk of considerable errors in forecasting.
Organizations are often unwitting accomplices, encouraging expectations that have a negative effect on the final result. Better formalization of forecasts and activity, more careful training at every level, and particular care in how employees are motivated (keeping the loss aversion ratio in mind) can minimize this risk.
(Alberto Viotto)