“We are risk-averse when we have something to gain, but risk-seeking when we have something to lose”
The reflection effect explains that we have opposite ‘risk preferences’ for uncertain choices, depending on whether the outcomes is a possible gain or a loss. The effect shows that both the Ambiguity and Risk Aversion biases are right, but only in cases where we can gain something.
Conversely, when we stand to lose something, we strongly prefer to take risks that might mitigate the loss (and therefore display risk-seeking behavior). This risk-averse versus risk-seeking behavior is called the reflection effect.
This reflection effect was discovered by Nobel-prize winner Daniel Kahneman and his late friend Amos Tversky, and included in their famous ‘Prospect Theory’. The Reflection Effect is expressed in the S shape of the value function in Prospect Theory: concave for gains (indicating risk aversion) and convex for losses (indicating risk seeking).
Scientific research example:
In their famous 1981 article “The framing of decisions and the psychology of choice”, Tversky & Kaheman describe the following dilemma:
Imagine that the U.S. is preparing for an unusual Asian disease, which is expected to kill 600 people. There are 2 possible programs to combat the disease:
- If Program A is adopted, 200 people will be saved.
- If Program B is adopted, there’s a 1/3 probability that 600 people wil be saved, and 2/3 probability that no people will be saved.
In this case we display risk-averse behavior and choose the ‘certain option’, Program A (72%).
However, Tversky & Kahneman gave a second group the same cover story, but with a different formulation of the alternative programs:
- If Program A is adopted, 400 people die.
- If Program B is adopted, there’s a 1/3 probability that nobody will die, and 2/3 probability that 600 people will die.
Now almost all switch to risk-seeking behavior, choosing program B (78%).
Online Persuasion tips
[checklist]
- When you want customers to make a risk-averse choice (such as staying with you), test by phrasing your USP’s as gains.
- When you want customers to make a risk-seeking choice (such as switching to you), phrase your USP’s as losses.
[/checklist]
Further reading on the reflection effect:
- Tversky, A. & Kahneman, D. (1981): The framing of decisions and the psychology of choice. Science, 211, 453 – 458.
- Kahneman, D. & Tversky, A., Econemetrica, Vol 47, No 2, 263-292 (1979); “Prospect Theory: An Analysis of Decision under Risk”.
- Lindzey, G. & Aronson, E. (eds.) (1985): The Handbook of Social Psychology, 3rd Edition.