Paradox of loss aversion

...but it is interesting that, all of a sudden, baseball teams and football teams become, in general, more strategically correct when they have more on the line.
In the World Series, closer usage is a lot better, when you bring your best guy in in the eighth inning or the seventh inning. You see in the NFL teams will go for two more often in the playoffs, go for it on fourth down more often in the playoffs. Which is a hint that when the stakes are low, culture tends to prevail. When the stakes are high and the outcome of the game is all that matters, then things are different.

An answer from Nate Silver in a conversation with Tyler Cowen, emphasis mine. The context is sports, but this is a paradox that occurs in real life so often, especially in the business world.

[BTW, a conversation between those two should be self-recommending, but if it isn't, consider this a recommendation. Sports and politics (what's the difference, really?), New York real estate, food, travel...they cover all their favorite topics.]

So often, companies will try anything that what is the right move, just because it's culturally expedient. Pressure from shareholders, investors, employees, reporters, your current users, and the public at large prevent companies from doing the right thing until they're at death's door.

It may be uncomfortable to do something controversial when things are going well (why rock the boat?), but it's far more pleasant to make changes when you're still growing than when you've hit the shoulder of the S-curve and are starting to flatline.

Mathematically, you should never buy insurance in Blackjack, even if you are dealt a Blackjack yourself, but depending on how you've been running up until then, you might buy insurance, just to break a losing streak. When things are going bad, you might stop hitting on 16 or 12 even when the probability says you should, even though it's sub-optimal strategy.

So many times at Amazon we'd do things that the stock market would punish, but Bezos had enough control of the company and the conviction to ignore the cultural pressure and make the right long-term move. It's not surprising that some of the most successful technology companies today like Facebook, Amazon, and Google are able to shrug off external pressures. The founders have a controlling stake, of course, but also the will to enable their employees to play optimal strategy all the time, even if the risk of failure is higher.

Successful modern technology CEOs remind me some of studio executives in the 60's, many of whom, like Robert Evans, enabled directors to take creative risks. Now that most movie studios are public corporations, largely set up as financing vehicles, that type of movie is harder to get off the ground. The economics have changed, too, but the larger point is that leaders who understand that loss aversion is sub-optimal strategy need to create an environment in which the right types of failures are tolerated, even encouraged.

Loss aversion is most damaging, I suspect, when it's your current users who protest the loudest. If you're not willing to do your own customer segmentation, the market does it for you, and the largest segment is the the silent majority that choose not to use your product/service.

Especially for networks, analyzing the people who've tried and abandoned your service is just as important, if not more so, than rejoicing over those that have. The latter are of course critical to understanding your product-market fit, but the former are just as critical to assess when you're likely to hit the upper shoulder of the S-Curve.

The paradox of loss aversion is that so much of tech is winner-take-all, like tournament poker instead of a cash game, so loss aversion is often the strategy that leads directly to total loss.