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

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

Key Takeaways

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

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

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
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
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In detail

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