Module I·Article II·~2 min read
Prospect Theory: Losses Are Felt More Acutely Than Gains
Cognitive Biases
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The Discovery by Kahneman and Tversky
Classical economics assumes symmetry: a loss of $100 “cancels out” a gain of $100. Kahneman and Tversky refuted this experimentally.
Loss Aversion: the pain from losing $100 is approximately twice as strong as the joy from gaining $100. This is not just a subjective feeling—it is a neurobiological fact: losses activate regions of the brain associated with physical pain.
Three Principles of Prospect Theory
1. Asymmetry of losses and gains: losses cause more pain than equal gains bring joy.
2. Diminishing sensitivity: the difference between $0 and $100 is felt more acutely than between $900 and $1000. We are more sensitive to changes near the reference point.
3. Reference Point: we do not evaluate absolute values, but rather deviations from a reference point. The same financial situation can be perceived as a “loss” or “gain” depending on expectations.
Framing: How Presentation Changes Decisions
The same fact, presented differently, leads to different decisions.
The famous experiment: 600 people are ill with a deadly disease.
- Program A: will definitely save 200 people
- Program B: 1/3 chance to save everyone, 2/3 chance to save no one
In the positive frame (“how many will survive”), most choose A. In the negative frame (“how many will die”): A: 400 will die; B: 2/3 chance that all die. Most choose B. Mathematically, the situations are identical, but the choice outcome is the opposite.
Business Applications
Pricing: “Without discount — 1200 rubles” works better than “With discount — 1000 rubles” (the latter triggers loss aversion to “overpayment”).
Negotiations: an offer presented as “elimination of losses” is more persuasive than a promise of benefits.
Investments: disposition effect—investors sell winning positions too early (locking in gains) and hold on to losing ones too long (avoiding realization of loss).
Practical Exercise
Take a sales offer you make to clients. Rewrite it twice: (1) in a positive frame—what they will gain; (2) in a negative frame—what they lose by not accepting. Evaluate which version is more convincing and why.
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