A: You will lose €100 with 100% certainty
Posted: Sun Dec 22, 2024 3:59 am
A: You have a 100% chance of winning €100
B: You have a 50% chance of winning €200 or a 50% chance of winning €0.
In such a situation, people seem to predominantly choose option A. A situation in which people can lose money:
B: You have a 50% chance of losing €200 or a 50% chance of no loss
Here people mainly choose option B, in which they seek risk. The graph below shows why people act differently in both situations. On the x-axis you see the objective value (money) and on the y-axis the subjective value (how much value you attach to the amount).
The curve is steep at the beginning and then flattens out. This is why we attach more value to an increase in our annual income from €20,000 to €40,000 than from €100,000 to €120,000 (the absolute value increases by the same amount).
The graph also shows that the us phone number list extra value we attach to €200 compared to €100 is not twice as great, and therefore not worth the risk of going from 100% certainty to 50% certainty. In the loss situation, the average subjective value of €200 loss and no loss is better than losing €100 with certainty.
Losses outweigh gains
In addition, you can see in the same graph that the curve in the negative domain remains steeper for longer than in the positive domain. This is because we weigh losses more heavily than gains. The negative emotion we experience when losing €100 is comparatively stronger than the positive emotion we experience when winning €100.
A practical implication for the marketing department is to emphasize what the visitor misses out on if he doesn't choose product X, rather than emphasizing what he gets in return.
Responding to the theory
A strong example in which both risk-averse and risk-seeking behavior is reflected is a trial subscription. Here, the consumer is first tempted to a free subscription to, for example, Spotify. There are no risks involved, only the profit of a free subscription for a month. However, after the free subscription has expired, people no longer want to do without it and canceling the subscription feels like a loss. We do not want to experience this loss, which is why we choose to extend the subscription.
B: You have a 50% chance of winning €200 or a 50% chance of winning €0.
In such a situation, people seem to predominantly choose option A. A situation in which people can lose money:
B: You have a 50% chance of losing €200 or a 50% chance of no loss
Here people mainly choose option B, in which they seek risk. The graph below shows why people act differently in both situations. On the x-axis you see the objective value (money) and on the y-axis the subjective value (how much value you attach to the amount).
The curve is steep at the beginning and then flattens out. This is why we attach more value to an increase in our annual income from €20,000 to €40,000 than from €100,000 to €120,000 (the absolute value increases by the same amount).
The graph also shows that the us phone number list extra value we attach to €200 compared to €100 is not twice as great, and therefore not worth the risk of going from 100% certainty to 50% certainty. In the loss situation, the average subjective value of €200 loss and no loss is better than losing €100 with certainty.
Losses outweigh gains
In addition, you can see in the same graph that the curve in the negative domain remains steeper for longer than in the positive domain. This is because we weigh losses more heavily than gains. The negative emotion we experience when losing €100 is comparatively stronger than the positive emotion we experience when winning €100.
A practical implication for the marketing department is to emphasize what the visitor misses out on if he doesn't choose product X, rather than emphasizing what he gets in return.
Responding to the theory
A strong example in which both risk-averse and risk-seeking behavior is reflected is a trial subscription. Here, the consumer is first tempted to a free subscription to, for example, Spotify. There are no risks involved, only the profit of a free subscription for a month. However, after the free subscription has expired, people no longer want to do without it and canceling the subscription feels like a loss. We do not want to experience this loss, which is why we choose to extend the subscription.