Thursday, June 14, 2012

Which would you rather do?

If you have to make a bet that has a 90% probability of making RM5000 or one that has a 50% chance of making RM12500, you are likely to bet on the first option. That is the one with high probability of getting RM5000.

The reason is explained in the seminal paper called The Prospect Theory:An Analysis of Decision Under Risk by Daniel Kahneman and Amos Tversky published in Econometrica in 1979. Download and read the original paper if you want. It went on to win a Noble prize in Economics though the scientists were psychologists. It was for their effort in bridging economics and psychology.

Marketing managers and brand/product managers should try to remember this. When you feel frustrated that your bosses does not have the foresight to approve your budget - for that big branding campaign you have in mind (no matter how well researched and backed up by data)? It’s the aversion to risk that is preventing them.

It’s human nature. Oh, yes… there is also their career prospect to think about if they bet wrongly.

What’s your prospect?

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