Prospect Theory explained

Cast your mind back to January 2021. When I do that, I just can't get the Simon and Garfunkel song, Hazy Shade of Winter out of my head. And that's because I'm now associating it with Time. In the sense that in January 2021, we were still in the middle of the pandemic, and of course, behaviour change and behavioural science and the demand for behaviour change marketing based campaigns was at its height.

 And so we ran a survey called “Help. I am not a behavioural scientist, get me out of here" across public sector, comms NHS, local government fire police, and we asked what are your biggest challenges and how confident are you feeling in delivering communications based messaging using behavioural science.

The overwhelming theme that came back was time.

Everyone was saying they just had no time to actually do it, whether to learn it, or whether to apply it to the standards that they wanted. 

Time just was the biggest  B.S. barrier. 

To really respond to the survey we've now running…drumroll please. We're launching The busy communicators guide to behavioural science. So this is going to be some core worksheets that will be made available to you for your CPD for free. And excitingly, we're going to lead with audio learning, it's a really popular style of learning. 

3:18  

Okay, so welcome to the busy communicators guide to Prospect Theory. 

We're going to do a very short overview on this. Clearly, we can't fit everything in. And what I've done is I've taken out the most salient points that I feel are most useful for us in our profession. 

But I will put in the shownotes, lots of links to more detailed conversations and more detailed reading for you.  But I just want to highlight that I don't think there's going to be anything in here that you don't already know. But I think the penny will drop as to why those things happen. As a communicator, you already know that things really need to be really salient, we need to break through the noise. And so Prospect Theory is just a little bit about the science as to why. And it's really good because if you're ever tempted or away from these gut feelings you've got, I'd say, as a marketer, stick with the gut, and there's some science behind it. So hopefully do prepare for some penny drop moments as we go through. 

And I like to start now with taking your mind back 300 years. So if this was a history book, we'd have a big chapter title -  the end of the rational era, 300 years of rule, and a heralded mathematician called Daniel Bernoulli a Swiss genius. He espouses a theory called Utility Theory to understand how humans make decisions based on risk. Little do you know, standing in this beautiful Swiss court in 1738, that this theory would come to dominate The Western world of economics for over 300 years. So to reduce years of complex research and modelling down to one sentence, basically, the utility theory was that we, as in humans, you and me, will make decisions primarily to avoid loss. And these decisions would be useful or have utility. So they would be in our best interests, aka rational. 

So now, just close your eyes for a moment and imagine the BBC news readers from the 1950s. You can hear this premise in action, the driving force behind the tone behind the delivery of the news, you know, it was very much I'm sharing with you some information with the expectation that you will take it seriously and apply it sensibly. There definitely was the sense of here's the information now make a very sensible, rational decision. 

So let's jump forward to the 1970s. And not only is the first female prime minister being elected, the Walkman has taken the world by storm. And interestingly, in 1979, the UK public sector workers were on strike, they were demanding a 60 pound a week minimum wage and the 35 hour workweek. So whilst all that's going on a revolutionary new economic theory has arrived, that basically ends this 300 year rule of the rational. 

This theory is called Prospect Theory. And it is the work of two geniuses, Nobel laureate Daniel Kahneman and his colleague, Amos Tversky.

7:13  

It signalled a huge paradigm shift that has continued to grow in strength to this day. And essentially, I like to call it the beating heart of behavioural science. And again, to really drill down years of complex research (they continued working on this until 1992) so literally years and years, decades of work into one sentence, it basically says that we are irrational. And we don't always make the best decision in favour of utility. 

So it sounds obvious, right? Yeah. How is this revolutionary? 

What's really important is it really truly was, this is a huge paradigm shift. And if we take a moment just to pause, and reflect on that, and if you think about your work, and the amount of requests that come in for you to sprinkle your fairy dust of magic, am I say that because I know it's cringe worthy. And I know it's so hated in the comms world, but if you think about all the incoming requests, there is so often this rational assumption that comes with them that please share this information. Yes, make it fun and lively. But please share this information with the expectation that the audience will hear it and do what is expected. 

So yes, it's a huge paradigm shift. But it's still a baby, we've gone through 300 years to 1979. I am older than this theory, I was born in 1975. So not by much, but still in the terms of science looking at it is it's a young theory, and it's still growing and evolving today, which is why behavioural science is just exploding. The research industry is just is huge. And it's growing a lot. So this is a cornerstone theory, which you can if you learn and understand you can be really confident in applying. 

So of course, it is slightly more complex than that one sentence and I'm going to share with you three concepts that break it down quite nicely. 

Certainty – offer a guarantee

Your audience wants certainty of avoidance of loss. And your audience will take greater risks to achieve that. You're thinking, you know, the more people lose, the more people are likely to actually take greater risks to avoid the loss because they've got nothing left to lose. And if we think about the national smoking campaigns been for well over a decade, I know I worked on them for 15 years, I think, and we've talked about it before. But one absolute genius move that they started and is probably familiar to everyone is that they do say that you're much more likely to quit using the service, and they even have a number. So is it 2.5. But anyway, they have a guarantee, they say you are much more likely to achieve your goal. And this is really important, especially when you're asking someone to lose so much when you quit smoking.

Okay. A nice fun example -  think about it in terms of products, when you're buying a TV, you know, they might say yes, we guarantee you can watch endless streaming of Netflix on our TV, absolutely wonderful cinema surround sound. And if you don't bring it back, no questions asked, okay, this is great, you might spend my money if I don't like it, there's no loss here. And this is really closely linked as well to the endowment effect, which we will come on to in a later episode, which just talks about the importance of getting people to try and use your information. 

The second is isolation effect. – We focus on differences more than we do similarities

12:08  

No surprises to anyone here that salience is essential. Prospect Theory explains that we as humans focus on differences more than we do similarities. 

Think of the matrix and the girl in the red dress, very salient, very obvious, and everyone goes and looks, but you know that already – you know that to break through the noise, you need to be as salient as possible. 

So for me as a marketer, I like this, because it brings out the role of the other elements of communication. So it brings out the role of the actual product of design of packaging, and all these other intrinsic paths that actually will take go a long way to reaching your goal. 

Loss looms larger than gains (2.5x larger)

So the other one is loss aversion. Loss Aversion looms larger than gains, our fear of loss is at least two and a half times greater than our joy of the game. 

It is applied in varying degrees, but it does remain consistent across everyone as we have a psychological response to loss. It's human nature to prevent that pain prevent that hurt. 

Importantly  the research pointed out something called a reference point. So a reference point was brand new, it did not exist in Utility Theory. The reference point understands that people will make decisions based on where they are in that moment. And this is why it is essential, because when we working with deprived communities, people without financial safety nets, their reference point is very different to someone else's reference point, who perhaps does have that safety net, which is why segmentation and marketing is absolutely essential. 

So if you think about your work programmes, and your campaigns, think about, well, how different does my audience respond to this loss? Do they perceive a loss? Is my current messaging triggering a loss when it doesn't need to? Am I talking more about gains than losses is human nature to focus on the losses?

They found in the research that we will quite naturally focus on what we're going to lose more than what we'll gain? So is it our job to actually make sure that we're shifting the narrative and making the game the game that bigger shiny a brighter, brighter, brighter, brighter thing to.

Ask yourself, do you understand your audience reference points?

14:57  

In 1995, the American Psychological Association studied the medal winners from the Barcelona Olympics. So they studied those wonderful Olympians who won their gold, silver and bronze medals. And it's a lovely way to illustrate the concept of the reference point. Because they found that silver winners were a lot unhappier than gold, and bronze winners. And that's simply because their reference point was, they were going for gold. So they have lost something. Whereas often in training and expectations, at a bronze medal winners level was actually the bronze was the highest, and perhaps they'd get fourth or fifth place. So they didn't lose. The study was done by the American Psychological Association, in 1995 and is a really nice way to just understand the power of framing and the reference point. 

And ultimately, at the end of the day, these are economic theories. And they're based around probability. But they're really useful for us to have as a deeper understanding of people, especially if we know there's some easy wins, we can make an are copy, and we're focusing in on a loss.

 And you can also easily shift it or I know my audience, I thought I did, but actually I don't, because I don't know what their point of references.

 I don't know what their reaction is to this loss. And actually, it could change your market research and your insight plan. Because you can might think I need to understand what the gains are.

 Transcribed by https://otter.ai