Loss Aversion: Why Candidates Reject Offers

Every day, recruiters around Asia speak to candidates to pitch positions and close deals, and sometimes offers are rejected. No matter what the market, one thing that is consistent is that the best candidates, the ones the client wants, are often not looking to change jobs per se.

Many candidates are what Nobel Prize–winning author Daniel Kahneman (Thinking, Fast and Slow, 2013) describes as loss averse. Numerous studies have suggested that losing something is twice as strong psychologically as the thought of gaining something. The phenomenon of risk aversion leads candidates to evaluate outcomes comprising similar gains and losses because people prefer avoiding losses to making gains. The pain of loss is so great that it can outweigh the gains.

Loss aversion implies that one who loses $50 will lose more joy than the pleasure another person will gain from acquiring $50. Therefore, some candidates may see a 10% increase in salary as not sufficient to compensate the fear of losing what they have.

The theory of loss aversion can also help explain the endowment effect that many candidates experience. The endowment effect describes how people place a far higher value on what they have in their hands than on an identical good that they do not own. Anyone who has tried to sell a car will have experienced the endowment effect.

This summer, we had a candidate turn down an offer from a client, and it logically didn’t make sense. The candidate held a managerial position with a European pharmaceutical company that had a modest pipeline. Our client was a firm with a bountiful pipeline, and they offered the candidate a 20% salary increase, a director title, and attractive career prospects. The candidate’s aversion to loss was so strong that the endowment effect created a rosy view of his present company. Logically we thought he’d take the offer, but he was emotionally tied to the company he already worked for.

It’s true that people make decisions based on emotion that they justify with logic at a later date. The takeaway here for recruiters, line managers, and HR personnel is that the offer we present can easily be seen differently from another person’s point of view. What candidates are losing is often at the top of their mind, and they may view their own position as more attractive than how others see it.

How can we counter these psychological forces?

  1. Have a compelling story; excite, motivate, and listen. Don’t assume your opportunity is better than the one they are currently working on, even if everyone thinks it is. Sometimes facts don’t matter. What matters is how the candidate views the world. Put yourself in their shoes. What will they lose?
  2. Acknowledge and empathize about the stress of changing jobs. Have candidates talk about their fears and what is great about their company. Don’t be afraid to get the positives out. Don’t assume they are halfway out the door.
  3. Get the interview process moving quickly. In recruiting, there is a bell curve; candidates need to have been offered and closed 75% to the top of the curve before loss aversion kicks in, and they slide down slowly toward rejecting the offer from the new company.
  4. Don’t assume the deal is done. Meet with the candidate to discuss the offer, answer questions, and address concerns.
  5. Remember, the offer is only as strong as how it’s perceived. No offer is neither good nor bad, but perception makes it so.
2019-03-05T08:21:49+00:00

2 Comments

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