Risk Aversion

We don’t like uncertainty and generally stick to what we know

When making choices, we tend to avoid new and mysterious alternatives, even when they come with significant benefits.

Barsky et al (1997). Preference parameters and behavioral heterogeneity. Quarterly Journal of Economics.

The study

Setup

11k people were offered a new job that had a 50% chance of doubling income for life, but it wasn't without risk, with an equal chance of it falling by either 20, 33 or 50%. Questioning started with the 33% gamble; if people took it, they were asked if they’d take the bigger 50% gamble too. But if they didn’t, they were asked about the smaller 20% one.

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Results

Results put people into four risk categories showing the majority were not willing to take any risk at all. 

np_read_2490885_000000

In detail

Key Takeaways

Focus on an improvement metric. 

We prefer the certainty of what we’re used to, so the benefits of switching to a new product need to feel substantial. Outline a  goal (relative performance, efficiency etc.) to anchor your product strategy around. Doing so will reduce uncertainty and boost comparisons against better-known, lower risk alternatives.

Offer a trial or free sample to create familiarity and reduce the risk around a new product. This sets the cost of new product usage at zero, during which the consumer will adjust their future preferences.

Utilize your brand umbrella. For any new sub-brands, reduce risk by clearly indicating the relationship to existing, familiar brands you own (Erdem, 1998).  

Product brands take note. Risk aversion is higher for material purchases than for experiential ones such as restaurant meals or holidays (Roche et al., 2015).

Product brands take note. Risk aversion is higher for material purchases than for experiential ones such as restaurant meals or holidays (Roche et al., 2015).

Risk Aversion

We don’t like uncertainty and generally stick to what we know

When making choices, we tend to avoid new and mysterious alternatives, even when they come with significant benefits.

Barsky et al (1997). Preference parameters and behavioral heterogeneity. Quarterly Journal of Economics.

The study

Setup

11k people were offered a new job that had a 50% chance of doubling income for life, but it wasn't without risk, with an equal chance of it falling by either 20, 33 or 50%. Questioning started with the 33% gamble; if people took it, they were asked if they’d take the bigger 50% gamble too. But if they didn’t, they were asked about the smaller 20% one.

Results

Results put people into four risk categories showing the majority were not willing to take any risk at all. 

Key Takeaways

Focus on an improvement metric. 

We prefer the certainty of what we’re used to, so the benefits of switching to a new product need to feel substantial. Outline a  goal (relative performance, efficiency etc.) to anchor your product strategy around. Doing so will reduce uncertainty and boost comparisons against better-known, lower risk alternatives.

Offer a trial or free sample to create familiarity and reduce the risk around a new product. This sets the cost of new product usage at zero, during which the consumer will adjust their future preferences.

Utilize your brand umbrella. For any new sub-brands, reduce risk by clearly indicating the relationship to existing, familiar brands you own (Erdem, 1998).  

Product brands take note. Risk aversion is higher for material purchases than for experiential ones such as restaurant meals or holidays (Roche et al., 2015).

Risk Aversion

We don’t like uncertainty and generally stick to what we know

When making choices, we tend to avoid new and mysterious alternatives, even when they come with significant benefits.

The study

Setup

11k people were offered a new job that had a 50% chance of doubling income for life, but it wasn't without risk, with an equal chance of it falling by either 20, 33 or 50%. Questioning started with the 33% gamble; if people took it, they were asked if they’d take the bigger 50% gamble too. But if they didn’t, they were asked about the smaller 20% one.

Results

Results put people into four risk categories showing the majority were not willing to take any risk at all. 

np_read_2490885_000000

In detail

Pairings

Conversion

Overcome change aversion with increasing exposure over time

Sudden, unexpected change can feel difficult to stomach, particularly when large in size or experienced by customers most sensitive to change, whether in character or by industry.

If you're rolling out a significant change, consider using the Mere Exposure Effect to slowly introduce the new concept and reduce Risk Aversion. The first exposure to the change should be light and ask little of the recipient. e.g. A poster on the wall or a light reference in an email.

But over time, consider ways to slowly increase the level of information and also the level of involvement. A show and tell, Q&A or digital opportunity to explore what is new at one's own pace.

Crucially, this should be done over time, so requires planning. The bigger the change, the more potentially-disruptive, and so the longer the window you should be working within.

What large, strategic changes are you planning down the line?

How might you start planning for these now with a series of small 'change exposures' that can grow gently over time?

Experience

Encourage product migration by creating parallel experiences

If you're undergoing a significant version change in the product or system your users work with, run the current and new versions in parallel for a while.

Default to the current, offering low risk, bite-size ways to dip into and explore the new version.

Be clear about the date at which the user will be defaulted to the new version.

Provide ample time for incremental exploration (measured in months, subject to the size of the change). Once the user has been defaulted to the new, maintain provision of access to the old for a time, to increase certainty further.

Finally, provide a clear date by which the old will no longer be accessed.

What significant systematic changes are you anticipating for your users? Where can you reassure them with a smooth migration process that reduces stress and, ideally, reinforces the value of the new?

Experience

Offer a small dose of situational control

Feeling a sense of control over our situation can give us great confidence and overcome unease in the face of change.

Where can you integrate choices that make people feel like they’ve “got this”?

Conversion

Guide through the new and unfamiliar with predefined choices

When we don’t know what to choose, we look for guidance. Defaults offer a great way to navigate the new.

Where can you guide people so that they can take action easily?

Conversion

To get them started, begin with a very small task

Giving people a low-risk taster is a great way to test out the new without fear.

Where can you provide moments to explore the unfamiliar?

Conversion

Make unfamiliar concepts easy to understand and connect to

Unfamiliar, hard-to-understand concepts will always trigger uncertainty.

How can you simplify messaging to ease cognitive processing and therefore familiarity?

For particularly-new ideas, how might you use existing metaphors to allow people to easily relate?

Connected to

Running workshops?

Risk Aversion

is included in Box One of our physical workshop tool.
is included in Box Two of our physical workshop tool.
Box One