Prospect Theory (Loss Aversion Thinking): Behavioral Economics and Design 02

Everyone wants to avoid losses. Simply put, prospect theory is about how losses influence human behavior.

What is prospect theory?

In English, "prospect" means expectation or outlook. Prospect theory is a theory developed by Nobel Prize-winning economist Daniel Kahneman and his colleagues that models how people form expectations regarding gains and losses.

There are many books on prospect theory, but I found this one, which describes the history of the research in quite some detail, to be easy to understand.

Introduction to Behavioral Economics
Yoshiro Tsutsui, Shunichiro Sasaki, Shoko Yamane, Greg Marudewa
Toyo Keizai Inc. 2017.04

There are two experiments like this. Let's start with the first one.

A. You are guaranteed to receive 1 million yen
B. If the coin lands on heads, you receive 2 million yen

In this experiment, most people chose A. Even though the calculation (expected value) is the same, people overestimate the risk of not receiving anything, even at 50%. Now, let's look at the other experiment.

A. From a state of -2 million yen, you are guaranteed to reach -1 million yen
B. From a state of -2 million yen, if the coin lands on heads, you reach 0 yen

In this case, conversely, many people choose B. Even though there is a 50% chance that the situation will not change with B, they choose the option that involves gambling.

The common point in these two experiments is that people have a tendency to want to avoid losses. In the first experiment, they want to reduce the possibility of getting nothing, and in the second experiment, the consciousness of wanting to pay off the debt quickly is at work.

Why don't we act rationally?

I can relate to this very well from personal experience. I often choose a service that is more expensive but safe rather than one where there is a possibility of a cancellation fee, and when I am losing in a small bet, I tend to get carried away.

This mechanism is said to stem from a survival instinct to avoid situations where food runs out.

However, in modern times, I think we see more of its negative aspects. For example, games with gambling elements that incite excitement, or seminars that stir up anxiety to make people buy products.

I would like to think about how we can use prospect theory in a positive direction, starting from what designers can do.

1. Provide reassurance

Personally, I don't think it's very good to present information in online reservations such as "How many people are viewing this now" or "Only X seats left, please hurry."

When applied to prospect theory, this situation becomes,

wanting to avoid risk = wanting to avoid the disadvantageous situation of not being able to make a reservation

so I think many people end up making a reservation due to loss aversion.

However, since such sites themselves make users conscious of risk, I think that if there is another site where they can book with peace of mind under the same conditions, theoretically, they would flow to that one.

Therefore, I believe that by changing such sites to provide information like "It's okay" or "Here are other options available," giving users a sense of security can increase the brand value of the service in the long term.I think.

* It was discovered that the "Only X left" display on a certain site was just displaying numbers randomly. I think the damage to the brand image is significant.

2. Let's provide feedback

By conveying a feeling of "thank you" for making a purchase, I think users can feel justified and convinced in their decision.

After purchasing, there are times when you feel anxious, thinking, "Was there something better? (Maybe I'm losing out)." If you leave the user's feelings as they are, they will try to look for other options next time to avoid loss, which does not lead to retention.

When thinking about user behavior using journey maps, etc., immediately after a purchase, there is not only a feeling of happiness but also a mixture of anxiety.Feedback is what dispels that anxiety.

When you post on note or send a "like," you receive feedback such as "Nice" or "Amazing." That is why I am able to continue. So, receiving many "likes" is encouraging. (Shameless plug)

3. Taking risks by daring to corner yourself

The third point is a way of thinking when involved in product development or business strategy as a designer.

Even while those around you are managing defensively, there are companies that succeed by daring to take risks and stepping forward. If we apply both to the experiment at the beginning,

・0 yen: If you fail, a loss of -1 million yen = better not to move
・-2 million yen: Make it 0 yen no matter what = grow (there is a possibility)

Successful managers seem to be taking risks boldly by daring to corner themselves. Conversely, if you are always thinking in a 0-yen state, you will stop taking risks, and as a result, you will become unable to respond to change.

This is a way of thinking that can be applied from business strategy to design proposals. Plans accepted by the majority tend to be safe ones that do not take risks, but if that project is required to change, I believe it is necessary to make proposals that take risks and foster a sense of crisis for that purpose.

Summary

That is all. I have considered that by mastering anxiety and security, it may be possible to create designs that improve the quality and value of services.

Stoking fear might lead to a short-term increase in sales. However, in the long run, it does not improve brand image, so I believe it is important to work on designs that evoke a sense of security and connection.

By the way, since behaviors related to prospect theory are often seen in gambling and competitive situations, reading books on the mindset of top professionals in those fields—such as professional shogi players, mahjong players, gamers, and athletes—can help you learn about attitudes toward risk and competition.

Finally, I have listed the books and resources I referred to.

・Predictably Irrational (Dan Ariely)
・Introduction to Behavioral Economics (Yoshiro Tsutsui et al.)
・Behavioral Economics: The Economy is Driven by Emotion (Norio Tomono)
・The Probability of Eureka: Economic Investigator Mamoru Fushimi (Tomotake Ishikawa)