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User Summit 2018 Decision Psychology Thursday , October 25, 2018

Explore the decision problem of saving costs or taking risks in asset management when faced with budget overruns. Compare the estimated consequences of two options and make an informed choice.

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User Summit 2018 Decision Psychology Thursday , October 25, 2018

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  1. User Summit 2018Decision PsychologyThursday, October 25, 2018 Richard Wahlund The Bonnier Family Professor in Business Administration, especially Media Stockholm School of Economics Department of Marketing and Strategy Center for Media and Economic Psychology

  2. The decision problem Imagine that you are responsible for some asset management at your company. You have just realized that this management will cost 300,000 Euros more than budgeted this year. You have figured out two options to countervail these higher costs. The estimated consequences of these options are shown below. Chose ONE of the two options. The amounts concern the 300,000 Euros at stake.

  3. The decision problem Imagine that you are responsible for some asset management at your company. You have just realized that this management will cost 300,000 Euros more than budgeted this year. You have figured out two options to countervail these higher costs. The estimated consequences of these options are shown below. Chose ONE of the two options. The amounts concern the 300,000 Euros at stake. Option 1: My company will save 100,000 Euros. Option 2: With 1/3:rd probability my company will save 300,000 Euros and with 2/3:rd proba- bility my company will save nothing.

  4. The decision problem Imagine that you are responsible for some asset management at your company. You have just realized that this management will cost 300,000 Euros more than budgeted this year. You have figured out two options to countervail these higher costs. The estimated consequences of these options are shown below. Chose ONE of the two options. The amounts concern the 300,000 Euros at stake. YOU OTHERS Option 1: My company will save 100,000 Euros. Option 2: With 1/3:rd probability my company will save 300,000 Euros and with 2/3:rd proba- bility my company will save nothing. Option 1: My company will lose 200,000 Euros. Option 2: With 1/3:rd probability my company will lose nothing and with 2/3:rd probability my company will lose 300,000 Euro.

  5. The decision problem Imagine that you are responsible for some asset management at your company. You have just realized that this management will cost 300,000 Euros more than budgeted this year. You have figured out two options to countervail these higher costs. The estimated consequences of these options are shown below. Chose ONE of the two options. The amounts concern the 300,000 Euros at stake. YOU OTHERS Option 1: My company will save 100,000 Euros. 75% 82% Option 2: With 1/3:rd probability my company will save 300,000 Euros and with 2/3:rd proba-25% 18% bility my company will save nothing. Option 1: My company will lose 200,000 Euros. 37% 25% Option 2: With 1/3:rd probability my company will lose nothing and with 2/3:rd probability63% 75% my company will lose 300,000 Euro.

  6. CEO:s in Swedish banks You has just been informed that the bank, due to increased competition, will need to reduce certain fees. This will cost the bank 300,000 Euro per year. You have considered two alternative actions to reduce these increa-sed costs. The estimated consequences of these actions are the following (the amounts concern the 300,000 Euro at stake): Bank CEO:s Alternative 1: The bank will save 100,000 Euro. 100% Alternative 2: With 1/3:s probability the bank will save 300,000 Euro and with 2/3:s probability 0% the bank will save nothing. Alternative 1: The bank will lose 200,000 Euro. 0% Alternative 2: With 1/3:s probability the bank will lose nothing and with 2/3:s probability the bank 100% will lose 300,000 Euro.

  7. Prospect theory Subjectivevalue (SV) Gain Reference point (the frame)

  8. Prospect theory Subjectivevalue (SV) Loss Gain Reference point (the frame)

  9. Prospect theory Subjectivevalue (SV) Gain Reference point (the frame)

  10. Prospecttheory Subjectivevalue (SV) Gain Referencepoint (the frame)

  11. Prospecttheory Subjectivevalue (SV) Gain Referencepoint (the frame)

  12. Prospect theory Subjectivevalue (SV) Loss Gain Reference point (the frame)

  13. Prospecttheory Subjectivevalue (SV) Loss Gain Referencepoint (the frame)

  14. Prospecttheory Subjectivevalue (SV) Loss Gain Referencepoint (the frame)

  15. Prospect theory Subjectivevalue (SV) Whentalkingaboutsavingmoney … SV(300’) x 1/3 300’ 200’ Loss Gain 100’ 300’

  16. Prospect theory Subjectivevalue (SV) When talking about saving money … SV(300’) x 1/3 300’ 200’ Loss Gain 100’ 300’ Whentalkingaboutlosingmoney … SV(-300’) x 2/3

  17. ”He made new deals to win back lost money”, i.e. took great risks when he shouldn’t.

  18. Other effects of loss aversion Whathappensifyou start savingmoneytoday? This is howmuchyoursavingswill be worthwhenyouturn 65. If saving … Age 200 SEK/month • 400 SEK/month • 600 SEK/month

  19. Othereffectsof loss aversion • Foregone or opportunity income: Missing out – a loss.

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  22. Othereffectsof loss aversion • Foregone or opportunity income: Missing out – a loss. • Limited time, availability or feature –> scarcity: You risk a loss.

  23. Othereffectsof loss aversion • Foregone or opportunity income: Missing out – a loss. • Limited time, availability or feature –> scarcity: You risk a loss. • Endowment effect 1 – commitment: Care about sunk costs.

  24. Othereffectsof loss aversion • Foregone or opportunity income: Missing out – a loss. • Limited time, availability or feature –> scarcity: You risk a loss. • Endowment effect 1 – commitment: Care about sunk costs. • Endowment effect 2 – consistency or status quo bias: e.g. customer loyalty, aversion against changes in general.

  25. Othereffectsof loss aversion • Foregone or opportunity income: Missing out – a loss. • Limited time, availability or feature –> scarcity: You risk a loss. • Endowment effect 1 – commitment: Care about sunk costs – sticks even to bad solutions. • Endowment effect 2 – consistency or status quo bias: e.g. customer loyalty, aversion against changes in general. • Business goals (R.O.I. etc.) as reference points.

  26. Othereffectsof loss aversion • Foregone or opportunity income: a loss. • Limited time, availability or feature –> scarcity: You risk a loss. • Endowment effect 1 – commitment: Care about sunk costs – sticks even to bad solutions. • Endowment effect 2 – consistency or status quo bias: e.g. customer loyalty, aversion against changes in general. • Business goals (R.O.I. etc.) as reference points. • Debt aversion – reciprocity.

  27. Othereffectsof loss aversion • Foregone or opportunity income: a loss. • Limited time, availability or feature –> scarcity: You risk a loss. • Endowment effect 1 – commitment: Care about sunk costs – sticks even to bad solutions. • Endowment effect 2 – consistency or status quo bias: e.g. customer loyalty, aversion against changes in general. • Business goals (R.O.I. etc.) as reference points. • Debt aversion – reciprocity. • We believe in trends, especially the ones we’re part of.

  28. Othereffectsof loss aversion • Foregone or opportunity income: a loss. • Limited time, availability or feature –> scarcity: You risk a loss. • Endowment effect 1 – commitment: Care about sunk costs – sticks even to bad solutions. • Endowment effect 2 – consistency or status quo bias: e.g. customer loyalty, aversion against changes in general. • Business goals (R.O.I. etc.) as reference points. • Debt aversion – reciprocity. • We believe in trends, especially the ones we’re part of. • We look for confirmatory instead of disconfirma-tory information: We don’t want to be wrong ...

  29. Nudging Nudge theory (or nudging) is a concept in behavioral science, political theory and economics which proposes positive reinforcement and indirect suggestions to try to achieve non-forced compliance to influence the motives, incentives and decision making of groups and individuals (e.g. proposed to be used by public authorities to make general policies effective). But how? By applying well-known psychological mechanisms such as cognitive biases and perceptual mechanisms to inten-tionally influence people.

  30. Theory is when you know everything but nothing work. Practice is when everything work but no one knows why. Today, theory and practice have been brought together: Nothing work and no one knows why.

  31. A final reminder … To get a pat on ones shoulder is surely a gain, but remember how easily a gain may turn into a loss …

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