Prospect TheoryOpen Access

Prospect Theory

A loss hurts more than an equal gain feels good

We take more risks to avoid the pain of loss. The more we gain, however, the fewer risks we continue to take and the less we feel with each gain.

Kahneman & Tversky (1979). Prospect Theory: An analysis of decision under risk. Econometrica, Vol. 47, No. 2, pp. 263-292.

The study

Setup

Setup

Prospect theory is explained with a graph. Negative losses and positive gains recorded on the horizontal are set against a vertical intensity of feeling for those losses or gains.

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Results

Results

As we gain more, we feel less for each gain. In contrast, even a small pain (shown in red) feels a lot more negative than an equal-sized gain feels good.

Study graph
np_read_2490885_000000

Kahneman & Tversky (1979). Prospect Theory: An analysis of decision under risk. Econometrica, Vol. 47, No. 2, pp. 263-292.

Key Takeaways

1
1

Package pain. Consumers will feel less overall pain from any costs incurred when you package and deliver them all together rather than when they're felt as separate, smaller pains.

Takeaway image
2
2

Spread out rewards. Instead of offering larger, chunkier benefits to consumers, break these down into smaller pieces, spreading them out across time. $10 given 4 times feels more valuable overall than $40 given once.

Takeaway image
3
3

Offer mixed product bundles. We feel less good with each thing we consume. Therefore, the first can of soda tastes better than the fourth. This means we'd get more complimentary value from a bag of chips instead. Look for ways to offer relevant, mixed product bundles to offset diminishing consumer sensitivity.

Takeaway image
4
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Takeaway image
Takeaway image
Prospect Theory

Prospect Theory

A loss hurts more than an equal gain feels good

We take more risks to avoid the pain of loss. The more we gain, however, the fewer risks we continue to take and the less we feel with each gain.

The study

Setup

Prospect theory is explained with a graph. Negative losses and positive gains recorded on the horizontal are set against a vertical intensity of feeling for those losses or gains.

Results

As we gain more, we feel less for each gain. In contrast, even a small pain (shown in red) feels a lot more negative than an equal-sized gain feels good.

study graph
np_read_2490885_000000

In detail

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Prospect Theory
A loss hurts more than an equal gain feels good

Prospect Theory's considered one of the most important (and confusing) concepts in Behavioural Science. We'll explore:

• The various mechanics of how it works

• Examples from the wild that use it well

• How you can use Prospect Theory in your work to improve experiences!

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Prospect Theory
A loss hurts more than an equal gain feels good
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