Evaluating
Prospect Theory
Customers evaluate outcomes based on perceived gains and losses rather than absolute value, often overvaluing potential losses and undervaluing equivalent gains, significantly impacting their decisions and satisfaction.
For Example
A telecom provider promoting a new plan emphasizing "Avoid losing your unused data!" rather than "Gain extra data each month!" effectively leverages Prospect Theory, as customers respond more positively to preventing a loss than achieving an equivalent gain.
Similar Biases
Similar biases: Loss Aversion, Endowment Effect, Status Quo Bias. Opposing biases: Overconfidence Effect, Optimism Bias, Abundance Mindset
We tend to remember tasks and goals that are not completed.
Prospect Theory, introduced by Daniel Kahneman and Amos Tversky, describes how individuals assess choices based on perceived potential losses and gains, rather than objectively evaluating outcomes. Central to this theory is the concept of loss aversion, meaning that losses are felt more deeply than equivalent gains. In Customer Experience (CX), this means customers react strongly to perceived risks, possible disappointments, or hidden costs, often prioritizing the avoidance of losses above seeking gains. For example, customers may hesitate to switch providers—even if the alternative is better—due to fear of potential inconvenience or hidden downsides. CX teams must carefully frame offers to highlight gains clearly while reassuring customers by proactively addressing potential fears or perceived risks.
Evaluating Risk Preferences: Insights from Prospect Theory Scenarios
Participants were asked to evaluate two scenarios: Scenario 1: A) 100% chance of winning $3000. B) 80% chance of winning $4000 and 20% chance of gaining nothing. Scenario 2: A) 100% chance of losing $3000. B) 80% chance of losing $4000 and 20% chance of losing nothing. Results indicated that in Scenario 1, most participants chose Option A, even though the rational choice would be Option B. In Scenario 2, the majority of participants chose Option B, even though the rational choice would be Option A. This illustrates how individuals tend to favor certain gains and riskier losses, aligning with the predictions of prospect theory.
The Impact of Reference Points and Framing on Treatment Decisions in Cancer Patients
In an experiment, participants were asked to imagine themselves as cancer patients required to choose between two treatments: Treatment A, chemotherapy, and Treatment B, surgical removal of the cancer. Participants first established a reference point, framing the decision as a matter of life and death. This reference point significantly influenced their choices, as the presentation of the treatments played a crucial role. Participants tended to choose the option perceived as having the least risk after evaluating their options against the reference point they had created. This demonstrates the impact of framing and reference points on decision-making in high-stakes medical scenarios.
Coffee Mug and the Endowment Effect
Participants valued mugs higher when they owned them compared to identical mugs they didn't own. Ownership created a perception of potential loss, inflating value significantly. Meaning for CX: Once customers perceive something as theirs (loyalty points, subscriptions, perks), they become highly resistant to losing it. CX teams should reinforce ownership feelings to deepen loyalty and reduce churn.
Highlight Avoidable Problems
Customers act faster when they perceive an opportunity to prevent loss. Brands must identify and communicate clearly how their solutions help customers avoid future inconvenience or regret.
Emphasize Protection, Not Just Benefit
When customers become aware of a brand, framing messaging around loss prevention (e.g., "Don’t miss out on essential features") resonates more strongly than simple gain-based messaging.
Frame Options Around Minimizing Risks
In comparison scenarios, customers choose options that explicitly protect against loss. CX should communicate clearly how their offerings prevent negatives rather than only providing positives.
Allow Customers to Feel Ownership
When exploring products, customers respond positively to interactions that make them feel ownership, thus invoking fear of loss if they walk away, enhancing engagement and reducing abandonment.
Reassure Against Perceived Risks
Customers overvalue risks when researching. CX teams must proactively address and clarify perceived negatives to reassure customers and guide informed, confident decisions.
Reinforce Loss Prevention
Customers hesitate less when selection is framed as preventing loss ("Secure your deal now") rather than just attaining a positive outcome. Messaging here should reinforce the avoidance of future regret.
Minimize Perceived Risks at Checkout
At the critical purchasing moment, clear and reassuring language ("No hidden costs, no regrets") ensures customers feel secure, lowering abandonment rates driven by fear of unexpected losses.
Affirm Choices to Avoid Buyer's Remorse
After purchase, proactively reaffirm customers' decisions by emphasizing how the choice helps avoid losses (e.g., "Enjoy peace of mind knowing you’re protected"), solidifying customer satisfaction and reducing churn.
Customer Experience Challenges
Typical challenges in CX where the bias can be used
- Control: Customers overreact negatively if they perceive potential loss of control. CX must reassure customers by clearly outlining how products or services protect rather than constrain autonomy.
- Risk: Customers amplify perceived risks, even for small losses. CX teams should transparently address and mitigate perceived risks, reassuring customers clearly and effectively.
- Confidence: Excessive fear of potential negative outcomes reduces confidence. CX should consistently provide reassuring information and proof-points, demonstrating reliability and security.
- Selection: Customers struggle to choose when focused solely on potential negatives. CX should clearly communicate differences in options by highlighting effective loss prevention clearly.
- Information: If risks or potential losses are unclear, customers hesitate. CX teams must transparently communicate potential downsides upfront to reassure customers effectively.
Customer Experience Pillars
Renascence CX pillars where it can be applied most efficiently
- Integrity: Clear, honest communication about potential losses or risks fosters trust, reducing anxiety-driven skepticism.
- Expectations: Managing expectations realistically, especially around potential risks or downsides, prevents customers from amplifying negatives irrationally.
- Resolution: Swift, transparent resolutions to perceived losses reassure customers that the brand can effectively manage potential negative outcomes.
- Effort: Minimizing effort required to avoid loss (e.g., simple return processes, clear guarantees) significantly improves customer confidence and reduces anxiety.
- Empathy: Demonstrating empathy by acknowledging customers' fears of loss reassures them that the brand genuinely cares, reinforcing loyalty and satisfaction.
Customer Experience Interfaces
Interfaces & touchpoints where it can be applied most efficiently
- Digital: Highlight loss prevention in digital messaging ("Never lose your preferences or data") to maximize user engagement.
- Voice: Customer service agents should reassure customers by emphasizing how their actions help avoid potential losses, reinforcing feelings of security.
- Promo: Promotions emphasizing "avoiding missed opportunities" or "protecting your benefits" resonate stronger than purely gain-based messaging.
- Product: Position products around protecting customer interests (e.g., data protection, insurance features) to tap into loss aversion.
- Shelf: Clearly indicate when products can prevent potential loss (e.g., "Avoid running out!") to boost sales.
Renascence Tip
Prospect Theory highlights the critical importance of framing within CX strategy. Brands should acknowledge customers’ heightened sensitivity to loss, carefully positioning offers to clearly communicate how choices can help avoid negative outcomes. Rather than emphasizing benefits alone, highlight how your brand helps customers safeguard what they already value. This approach not only reduces anxiety around purchasing decisions but also reinforces trust and long-term engagement by proactively addressing customer fears.
