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Prospect Theory

 

Explanations > Theories > Prospect Theory

Description | Research | So What? | See also | References 

 

Description

We tend to value a gain that is certain more than a gain that is less than certain, even when the expected value of each is the same. The opposite is even more true for losses: we will clutch at straws to avoid a certain loss, even if it means taking even greater risks.

In general, when we perceive higher risk we focus on loss, whilst when risk is seen to be lower, we switch to gains.

Research

Tversky and Kahneman told people to assume there was disease affecting 600 people and they had two choices: 

  • Program A, where 200 of the 600 people will be saved .
  • Program B, where there is 33% chance that all 600 people will be saved, and 66% chance that nobody will be saved.

The majority of people selected A, showing a preference for certainty. They then offered them another choice:

  • Program C,  where 400 people will die.
  • Program D, where  there is a 33% chance that nobody will die, and 66% chance that all 600 people will die.

Most people now selected D, seeking to avoid the loss of 400 people.

Notice how the framing makes the difference. A and C are the same, and B and D are the same.

So what?

Using it

To get people to adopt something, focus on the gain. To get them to reject something, focus on what they might lose.

If they perceive high risk, focus on loss. If they perceive low risk, focus on gain. If you want them to focus on loss or gain, then set up the perceived risk accordingly.

Defending

In your choices, beware of words leading you astray. Think in a balanced way about potential gains and losses.

See also

Framing, Operant Conditioning, Perceptual Contrast Effect, Risk bias

http://epse501.freeservers.com/prospect_theory.htm

References

Tversky and Kahneman (1981)

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