Prospect Theory or Let’s Teach People to Walk

Last updated December 6th, 2023 00:16

Prospect theory examines human decision-making under conditions of risk and uncertainty. This behavioral theory focuses on how people perceive and evaluate different options and make decisions based on these perceptions. The headline “Prospect theory, or let’s teach people to walk” might seem humorous, but it is not.

According to prospect theory, people do not solely rely on rational decision-making based on expected value and outcome probabilities. Instead, their decisions are influenced by emotions, perception of gains and losses, and relative changes in status. The theory emphasizes that people tend to be more sensitive to losses than equivalent values of gains.

Prospect Theory, or Let’s Teach People to Walk

Prospect Theory or Let’s Teach People to Walk

How can prospect theory be applied simply in practice? Or how can loss motivate people? Based on prospect theory, an interesting experiment was conducted to examine how to motivate people to walk more kilometers daily. And three model situations were created.

  • People were not motivated externally in any way.
  • Subjects received a financial reward for each accomplished day.
  • Subjects incurred a certain amount of financial loss for each unaccomplished day.

People without external motivation

In the first situation, people had absolutely no external motivation. The goal, let’s say 10,000 steps per day, relied solely on their internal motivation to live healthier. Whether this target group achieved their 10,000 steps or not was not evaluated.

Motivation by financial reward

The second situation involved external motivation for the target group. For each day the subjects in this group achieved the goal, they received a financial reward. Let’s say 100 CZK.

Motivation by financial loss

The third situation was the most interesting. People in this group received a financial reward at the beginning of the project. If they did not achieve their daily goal of 10,000 steps, a certain amount was deducted from the received reward, resulting in a loss. The final amount, like in the second group, depended on whether the goal was achieved or not.

As evident from the examples, the difference between the second and third groups was that the second group gained finances, and the amount increased, while the third group had the opposite. The amount decreased for every day they did not achieve their goal of 10,000 steps.

Prospect theory in practice

Now, onto the interesting results. Since people, according to prospect theory, are more sensitive to loss, which psychologically hurts more, group number three was the most successful. These individuals were motivated by loss. And because loss is a negative emotion they tried to avoid, they achieved the best results.

Paradoxically, group number one and two had practically identical results. There was no significant difference between them in percentage terms. And here, the effect of prospect theory fully manifests, showing that gain does not provide sufficient motivation to compel people to live healthier compared to loss.

Regarding the comprehensive results, group number three achieved approximately 50% better results compared to the rest.

Prospect Theory, or Let’s Teach People to Walk. Conclusion

The Nobel Prize was awarded for prospect theory in 2002. American psychologist Daniel Kahneman received this prestigious accolade for his research and contributions to the field of behavioral economics.

Daniel Kahneman developed prospect theory, which became a significant contribution to understanding human decision-making and behavior in the context of risk and uncertainty. His work has influenced the field of economics, psychology, and other social sciences. This is just one interesting case where this theory can be applied in practice.

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