Risk AversionOpen Access

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

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

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

Study graph
np_read_2490885_000000

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

Key Takeaways

1
1

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.

Takeaway image
2
2

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.

Takeaway image
3
3

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

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4

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).

Takeaway image

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).

Takeaway image
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Risk Aversion

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.

study graph
np_read_2490885_000000

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