Monday 14 December 2020

Loss Aversion, and the dis-incentives for KM-based change

The risk of loss of the status quo can be a powerful disincentive for change, and can be a powerful factor working against knowledge management implementation.

There is a very apt quote from Machiavelli (The Prince, 1532), which applies to Knowledge Management as it does to any change initiative:
“There is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things, because the innovator has for enemies all those who have done well under the old conditions, and lukewarm defenders in those who may do well under the new.” 
As Machiavelli points out, the status quo is a powerful factor. Introducing something new, such as KM, disturbs the status quo without yet providing anything tangible to replace it. Sometime in the future Knowledge Management will deliver rewards, but people are always more unwilling to lose tangible benefits in the here and now, in return for potentially bigger but intangible benefits in the future.

This is known as "loss aversion".

Wikipedia tells us that in economics and decision theory, loss aversion refers to people's tendency to strongly prefer avoiding losses to acquiring gains. Most studies suggest that losses are twice as powerful, psychologically, as gains.  This is reflected strongly in Machiavelli's quote.

Implementing KM involves change, all change involves loss, and all loss leads to aversion. Therefore you will make enemies of anyone who sees that they will lose something - power, prestige, profile - as knowledge management is introduced.

Elon Musk, as reported on the Farnham Street blog met a similar loss aversion from the regulators when proposing a re-usuable space rocket.

"There is a fundamental problem with regulators. If a regulator agrees to change a rule and something bad happens, they can easily lose their career. Whereas if they change a rule and something good happens, they don’t even get a reward. So, it’s very asymmetric. It’s then very easy to understand why regulators resist changing the rules. It’s because there’s a big punishment on one side and no reward on the other. How would any rational person behave in such a scenario?"
So how do we tackle loss aversion when implementing Knowledge Management?
  • Wherever possible, we make a case for change by maintaining that the status quo is undesirable. Maybe not sharing knowledge, or not learning from others, can be shown to put the profitability of the organisation at risk. Maybe failing to retain knowledge means that in 5 years time the organisation cannot compete.
  • Secondly we paint a picture of the KM-enabled future. We do this through proof of concept activity and piloting, so people can see for themselves how KM works, and can hear from their colleagues about the benefits it brings.

These two approaches allow people to re-set the loss aversion equation, by reducing the value of the status quo and increasing the tangibility of the KM future. This makes it safer for people to make the change.

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