Prospect Theory eMindset

November 27, 2016 – This post was published and lived happily on the Engel Journal until around August 2013 when I changed from a self hosted WordPress site to WordPress.com. Fortunately, a PDF version of the eMindset exists for you to see here:

 

ORIGINAL POST

Lauri D. Goldenhersh & David Eisaiah Engel.
April 30, 2010. San Diego, CA.

Explain This

Prospect Theory

People make decisions under risk in four ways

High probability chances

Faced with gain, prefer less risk Which feels more comfortable:
Faced with loss, prefer more risk Win $1,000 (100% chance) vs. $2,000 (50% chance)?
Decisions evaluated against reference point Lose $1,000 (100% chance) vs. $2,000 (50% chance)?
Reference point = status quo (usually)
Completed:
How can advertisers use this? A: Frame offer as loss prevention
Prospect Theory: Decision making under high probability risk

Prospect Theory: Decision making under low probability risk

Prospect Theory: People value certainty

Low probability chances

Preferences reversed Which feels more comfortable:
Faced with gain, prefer more risk Win $1,000 (5% chance) vs. $50 (100% chance)?
Faced with loss, prefer less risk Lose $50 (100% chance) vs. $1,000 (5% chance)?
Completed:
How can advertisers use this? A: Use a high risk, high reward offer

Loss > gain

Loss is 2x more powerful than gain (emotionally) How would you feel about winning $1,000?
“The aggravation that one experiences in losing a sum of money appears to be greater than the pleasure associated with gaining the same amount.” – Kahneman & Tversky How would you feel about losing $1,000?
Completed:
How can advertisers use this? A: Position as insur- ance against a bigger loss

Certainty is best

People tend to prefer certainty, even if reward is smaller Which feels more comfortable:
Win $1,000 (100% chance) vs. $3,000 (50% chance)?
Completed:
How can advertisers use this? A: Give prospects a safety net–like a 100% satisfaction guarantee

History

Amos Tversky & Daniel Kahneman What can we learn from the authors’ unconventional method of research?
Started work around 1975 Which professional disciplines regularly use this theory?
Original name “value theory” How can I use this theory in my line of work?
Met each afternoon for several hours
Gambled & observed their own instincts
Assumed their instincts were true for all people–to rapidly formulate theory
In a few months, 20+ theoretical formulations
Seriously verified formulations later
Introduced final theory in 1979 issue of Econometrica – ‘Prospect theory: an analysis of decision under risk’
Completed:
This eMindset is based on the article by Chris Guthrie, “Prospect Theory, Risk Preference and the Law,” Northwestern University Law Review 97.3 (2003), Questia, Web, 28 Apr. 2010. What theories does Prospect Theory disagree with? A: Rational choice theory, Expected utility hypothesis
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