Prospect Theory…And How It Can Transform Your Executive Conversations

By Conrad Smith, Vice President, Consulting Services

January 3, 2017

risks-ahead

All of your road warriors have lived through this. I was in the airport terminal last week getting ready to board my flight home when an announcement came from the customer service desk: The flight was overbooked. The airline was looking for a volunteer to give up their seat and take a later flight home, in exchange for a $500 voucher they could apply to their next trip.

For a small inconvenience—the next flight to the same city was leaving in a few hours—the airline would give some willing passenger the chance to make a significant monetary gain. And yet the announcement was made, and it was followed, predictably, by crickets. No one budged. “Thanks, but no thanks,” was the collective mood in the terminal. Everyone there, myself included, was just fine with the ticket we already had. All of us had made the calculation that what we had in our pockets—a ticket home at the time we’d planned for—was more valuable than a small delay, plus a $500 voucher that might cover much or all of the airfare for our next trip or vacation.

This scene in the terminal is loss aversion in action.

Let me explain why understanding how this principle works can transform how you engage with executive decision-makers—and how new research proves it.

Prospect Theory

When the social psychologist duo Daniel Kahneman and Amos Tversky tested the concepts of loss aversion (our resistance to losing what we have) and risk-seeking (our willingness to take risks), they reached a fascinating conclusion about decision-making: They found that humans are two- to three-times more likely to make a decision to avoid a loss than they are to make a decision to attain a gain. This is known as “Prospect Theory.”

So, what many airlines may not know when they ask volunteers to give up their seat on an overbooked flight is that they’re actually trying to override a powerful decision-making instinct. When humans have something, they are none too inclined to give it up—even if “the math” says they should.

Some of my Corporate Visions colleagues and I found the concept of Prospect Theory compelling, but were still wondering how much of an influence it had on executive decision-makers, long regarded as strictly rational people, unswayed by emotions.

Collaborating with Dr. Zakary Tormala, an expert in messaging and social influence, we recruited 113 executives from a range of industries and asked them to participate in an experiment designed to test whether Prospect Theory applies in an executive selling context. Turns out, it does—big time. What the experiment also showed is that you can make an emotional impact with executive decision-makers that can sway deals in your favor…but only if you frame your conversations appropriately.

In one of the three scenarios we tested—a business decision-making situation—we split participants up into two different conditions, which were mathematically identical but framed differently. To begin, all participants received the following instructions:

“The following question asks you to choose between two courses of action when facing an economic downturn. Please read the question and choose one course of action: A large car manufacturer has recently been hit with a number of economic difficulties and it appears as if three plants need to be closed and 6,000 employees laid off. The vice president of production has been exploring alternative ways to avoid this crisis. She has developed two plans.

Following this overview, participants received information about the two options. The options were mathematically identical across the gain and loss frame conditions. Importantly, though, they differed in whether they were framed in terms of gains or losses.

In the gain frame condition, the options were described in terms of how many plants and jobs would be saved:

Plan A: This plan will save one of the three plants and 2,000 jobs.

Or…

Plan B: This plan has one-third probability of saving all three plants and all 6,000 jobs, but has two-thirds probability of saving no plants and no jobs.

In the loss frame condition, the options were described in terms of how many plants and jobs would be lost.

Plan A: This plan will result in the loss of two of the three plants and 4,000 jobs.

Or…

Plan B: This plan has two-thirds probability of resulting in the loss of all three plants and all 6,000 jobs, but has one-third probability of losing no plants and no jobs.

While both choices were mathematically equal, the wording was changed to see if we could affect the “persuade-ability” of executives to consider the riskier alternative (in both cases, Plan B).

As it turned out, there was a statistically significant difference in participants’ choices across the two conditions. In the gain frame condition, 74 percent chose Plan A, while 26 chose Plan B. In the loss frame condition, 55 perception chose Plan A, while 45 percent chose Plan B. That jump from 26 percent to 45 percent is significant: Essentially, there was a 70+ percent increase in the number of executives willing to take the risky bet when it was framed in terms of a loss instead of a gain.

There is nothing rational about that reaction. What this strongly suggests is that executives are nothing like the emotionless, math-focused robots that the old stereotypes suggest.

Why does this matter to marketers and sales pros? When you’re the outsider trying to convince an executive to switch from their incumbent to your solution, you have to overcome their deep emotional objections to the idea of doing something different than what they’re doing today. When you’re the outsider, you represent a business risk. The big breakthrough finding from this experiment—which tested two other scenarios in addition to the one above—is that you don’t have to rely strictly on numerical value propositions to make your case. Your messaging matters. Emotions and intuitions clearly have a major influence on the decision-making process. Your ability to convince executives to take a perceived business risk and change to your solutions could come down to your ability to apply the knowledge of Prospect Theory to your customer conversations—showing executive buyers not what they stand to gain by switching to you, but what they stand to lose if they don’t.

Want to learn about the other business and personal decision-making scenarios tested in the study? Check out the research brief.

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