Post by paola on Apr 25, 2016 7:07:51 GMT
The Prospect Theory (est. 1979) – discussed and illustrated in two of this week’s readings – is a theory of decision-making under uncertainty. The field of Economics encompasses a wide range of decision-making theories, but I found this theory to be particularly interesting due to its specific applicability in the marketing industry.
Before delving into the theory’s application in the field of marketing, I will briefly discuss the theory and its major constituents. In its original form, the prospect theory is defined as “decision making under risk [that] can be viewed as a choice between prospects or gambles” (Kahneman). Each prospect or gamble is associated with a particular probability. Whether we are conscious about such decision-making or not, we make decisions that involve great uncertainty and risk every single day. This theory is used to better describe and even predict the choices that a typical person will make between a given set of prospects. A few of the theory’s constituents are:
1. Certainty – People have a clear preference for certain situations and guaranteed outcomes. People are willing to sacrifice income in order to obtain more certainty.
2. Loss Aversion – People pay more attention to the losses of an outcome than to its gains.
3. Relative Positioning – People pay more attention to their relative gains and losses rather than their overall final income. If your relative position doesn’t improve, then you won’t feel better off – despite the fact that your income could be increasing dramatically. We like to see immediate effects/outcomes, in other words. Why is that?
4. Low Probabilities – People tend to underestimate and discount the effects of low probabilities. We must be more wary of such low probabilities.
The prospect theory can be used to make effective advertisements by swaying peoples’ decisions to buy a certain brand/product. According to the theory, when faced with a certain product, consumers compare the actual price with a reference price in their mind (Liu). If the actual price is higher than the reference price, the consumer will see it as a loss and will not buy it. If the actual price is lower than the reference price, however, then the consumer will see it as a gain and buy it. Therefore, it should be a marketer’s aim to place a high reference price for its products in its consumers’ minds (Liu). This can be done through advertisements. The advertisement should present the product as a glamorous-looking, high-quality product. This will force the consumer to associate the product with a high reference price. Then, when faced with the lower, actual price, the consumer will code the product as a gain and buy it.
With that being mentioned, what are the shortcomings of applying the prospect theory to the concepts of branding and marketing? Why aren’t many marketers and practitioners using this theory? What other existent applications of the prospect theory can you think of?
Works Cited
Kahneman, D., & Tversky, A.. (1979). Prospect Theory: An Analysis of Decision under Risk. Econometrica, 47(2), 263–291. doi.org/10.2307/1914185
Liu, Yuping. "Prospect Theory: Developments and Applications in Marketing." (1998)
Before delving into the theory’s application in the field of marketing, I will briefly discuss the theory and its major constituents. In its original form, the prospect theory is defined as “decision making under risk [that] can be viewed as a choice between prospects or gambles” (Kahneman). Each prospect or gamble is associated with a particular probability. Whether we are conscious about such decision-making or not, we make decisions that involve great uncertainty and risk every single day. This theory is used to better describe and even predict the choices that a typical person will make between a given set of prospects. A few of the theory’s constituents are:
1. Certainty – People have a clear preference for certain situations and guaranteed outcomes. People are willing to sacrifice income in order to obtain more certainty.
2. Loss Aversion – People pay more attention to the losses of an outcome than to its gains.
3. Relative Positioning – People pay more attention to their relative gains and losses rather than their overall final income. If your relative position doesn’t improve, then you won’t feel better off – despite the fact that your income could be increasing dramatically. We like to see immediate effects/outcomes, in other words. Why is that?
4. Low Probabilities – People tend to underestimate and discount the effects of low probabilities. We must be more wary of such low probabilities.
The prospect theory can be used to make effective advertisements by swaying peoples’ decisions to buy a certain brand/product. According to the theory, when faced with a certain product, consumers compare the actual price with a reference price in their mind (Liu). If the actual price is higher than the reference price, the consumer will see it as a loss and will not buy it. If the actual price is lower than the reference price, however, then the consumer will see it as a gain and buy it. Therefore, it should be a marketer’s aim to place a high reference price for its products in its consumers’ minds (Liu). This can be done through advertisements. The advertisement should present the product as a glamorous-looking, high-quality product. This will force the consumer to associate the product with a high reference price. Then, when faced with the lower, actual price, the consumer will code the product as a gain and buy it.
With that being mentioned, what are the shortcomings of applying the prospect theory to the concepts of branding and marketing? Why aren’t many marketers and practitioners using this theory? What other existent applications of the prospect theory can you think of?
Works Cited
Kahneman, D., & Tversky, A.. (1979). Prospect Theory: An Analysis of Decision under Risk. Econometrica, 47(2), 263–291. doi.org/10.2307/1914185
Liu, Yuping. "Prospect Theory: Developments and Applications in Marketing." (1998)
