Prospect Theory

Changing your Reference Point

Prospect Theory

Prospect Theory describes how individuals assess their loss and gain perspectives in an asymmetric manner.

Read to find out how consumers react to Prospect Theory…

A disease has just come over the people of Rockland and only 100 people have survived.

The disease is vicious and has affected 600 people.

Among the survivors are three scientists, Rico, Dan, and Bobby.

Rico and Dan work all day and night to find a solution to this pandemic.

Bobby is a bit shaken up by the whole experience and decides to take a couple days to regain his composure.

Rico and Dan get to work on finding a solution to help save the infected people.

After all their research, they come up with two plans to save the infected people of Rockland.

The first plan (Program A) ensures that 200 of the 600 people will be saved.

The second plan (Program B) offers a 33% chance that all 600 people will be saved, and 66% chance that nobody will be saved.

The survivors mull over both options, and ultimately the majority decides to go with Program A because of its certainty.

Just as the survivors are about to inform Rico and Dan about their decision, Bobby returns and announces that he has discovered two additional solutions to the disease!

Intrigued by what he has to say, the survivors and scientists give Bobby the floor to speak.

Bobby’s first plan (Program C) claims that 400 people will die.

Bobby’s second plan (Program D) offers a 33% chance that nobody will die, and 66% chance that all 600 people will die.

Seeking to avoid the loss of 400 people, the survivors ultimately choose Program D.

Let’s examine why the survivors decided to switch their minds.

We tend to value a gain that is certain more than a gain that is less certain, even when the expected value of each is the same.

In regards to losses, something remarkable happens. We will take greater risks when faced with a certain loss.

Programs A and C are the same. Programs B and D are the same.

The reason the survivors changed from A to D is because of framing ~ they were faced with the certainty of what they would lose. 

To get people to adopt something, focus on the gain.

To get them to reject something, focus on what they might lose.