Thread by @warikoo

This right here, is almost all of consumer psychology summarized.

This picture is a real-life proof (take it for what it's worth) of the Prospect Theory - which was presented by Dan Kahneman and Amos Traversky in a seminal paper in 1979
bit.ly/2Gsq7i2

They (actually only Kahneman) went on win the Nobel prize in 2002.

A layman summary of the theory is
Pain from loss >> Pleasure from gain

It said
People are willing to take a sure shot than gamble on getting higher gains (another form of loss aversion) - which is shown in Poll 1
(60% took the sure shot Rs. 500)

You increase the amount to 1L - this 60% will become even higher.

You increase it to 1Cr - and almost everyone will take the sure shot.

Mathematically, the expected outcome is the same
100% of sure shot amount = 50% of double the sure shot amount

But people are not rational

It also said
People are far likelier to gamble to avoid sure shot loss (another way of describing loss aversion)
Which explains poll 2 results
70% would spin the wheel rather than take the sure shot loss

You increase the sure shot loss amount and even more people will gamble.

Which in other words means,
so called Risk averse people (in Poll 1 who took the sure shot) become risk loving when it comes to avoiding loss.

This seems very intuitive and obvious, but when described with data in 1979 was path breaking.

We used to use this a lot at nearbuy

If a deal had 2 choices
Option 1: Pick from 1 starter, 1 main course and 1 dessert (equivalent to sure shot option)
Option 2: Get X% off on the entire bill (equivalent to spin the wheel)

People opted for Option 1.
Because they didn't know beforehand what they would order.

If a deal said
Get Rs. 500 off
That was better than saying Get 50% off - even if both options gave the same results

If we showed deals that had already expired in the search results, that would drive higher conversion, than if we only showed live deals.

Because people realized they lost out on something. The pain from that was greater.

The biggest impact I saw though was in running the company

If people had a fixed salary of 100 and variable expected pay of 10, their CTC was 110
If we announced the variable pay has been increased to 30, people were happy.
Their CTC was now 130

But if we didn't do well as a company and had to cut down the variable pay from 30 to 20, thus bringing the CTC to 120, people were far angrier than they were happy when it went from 100 to 130

The drop from 130 to 120 affected them more
Than the gain from 100 to 130

I can spend a lifetime on how this paper changed so much about how I saw the world, from the point I read the paper.

There is a great book
Thinking fast, Thinking Slow which is a wonderful introduction to this concept (and a lot of powerful concepts)
amzn.to/34koqeH

The book that I loved more though was
The undoing project
It the story of how Kahneman and Tversky came together, how they fell apart and how their research changed the world in such meaningful ways.
(I am a sucker for stories)

amzn.to/3imm1Fj

I hope you pick up these 2 books, read the paper and realize this deep embedded loss aversion human mind of ours and how it is constantly at work in so many ways :)