People tend to overweigh options that are certain, and are risk averse for gains. There are three important aspects to the value function that effectively distinguish it from expected utility in particular. 100% chance to win $900. Aurora Harley is a Senior User Experience Specialist with Nielsen Norman Group. What distinguishes loss aversion from risk aversion is that the utility of a monetary payoff depends on what was previously experienced or was expected to happen. to loss aversion. Subscribe to the weekly newsletter to get notified about future articles. Prospect theory is characterized by: – Certainty:when presented with options, humans will nearly always choose the one with certainty. Replicating patterns of prospect theory for decision under risk, Nature Human Behaviour (2020).DOI: 10.1038/s41562-020-0886-x So prospect theory has two parts. If we can uncover people’s concerns through user research, we can provide information to help them overcome those fears or objections. Changing the framing of the problem (by adjusting the initial gift and the options accordingly) led people to a different decision. In fact, in order to achieve more certainty, people are willing to sacrifice income. View. Loss aversion is also related to prospect theory, developed by Nobel Prize winner Daniel Kahneman and Amos Tversky. Prospect theory encompasses two distinct phases: (1) an editing phase and (2) an evaluation phase. To explain loss aversion, behavioral economists rely on a model, developed in 1979, called prospect theory. When everything works as expected, people consider that the norm. Remembering all the details of each individual option creates too much of a cognitive load, so it only makes sense to focus on the differentiators. First, the model examines the way in which value is related to the original reference point, or the start of action or choice. For example, if we have wealth of £100,000 but lose 20% – we will be very unhappy. For products or services that do not inherently guard against large losses, we can convince users to take certain actions by understanding what their inhibitions may be. Loss Aversion. But, once anything goes slightly wrong, people balk and remember those bad experiences for much longer. The principle is prominent in the domain of economics. The prospect theory can also be extended to apply to people’s overall user experiences. Aurora’s research and consulting experience includes organizations in a variety of industries, such as ecommerce, travel, healthcare, and B2B (business-to-business). And prospect theory explains all that. In the next lecture we will continue with another aspect of prospect theory. Some studies have suggested that losses are twice as powerful, psychologically, as gains. We react more strongly to moments of loss — in the form of frustration or confusion that may occur during an interaction with a website or an app. We dub this combination 'myopic loss aversion'. In both these situations, the expected utility of both choices is the same (+/-$900): the probability multiplied with the expected win. In both scenarios people were given an initial amount of money, and then had to choose between two alternatives. The negative formulation primes people to think of the possible “loss” or negative outcome and to act accordingly. Article. We would rather get an assured, lesser win than take the chance at winning more (but also risk possibly getting nothing). Framing effects demonstrate the way in which the substance of a person’s choice can be affected by the order, method, or wording in which it is presented. History of Prospect Theory. Understanding these biases can help persuade people to take action. When creating content to persuade people into making a certain choice, consider how it is framed. (Sadly, Tversky had died when the prize was awarded.). Our editors will review what you’ve submitted and determine whether to revise the article. This uncertainty made the decision rather difficult: I could save my insurance money and hope for my cat to remain perfectly healthy, but if a health issue were to appear I would possibly need to spend exorbitant amounts of money for treatment. Her contributions to SAGE publication's. However, when it comes to making decisions such as whether to purchase something, make a donation, or pick a level of a service, people are highly susceptible to cognitive biases, and often don’t make the logical choice. First, people treat outcomes that are deemed to be either certain or impossible very differently than those whose changes take place in the midrange of probability. Utility for gains and for losses must be determined simultaneously, i.e., or! Lookout for your Britannica newsletter to get trusted stories delivered right to your inbox for all items decision-making depends choosing! Other things, some of the prospect theory enters its second, evaluation phase simultaneously less. 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