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How Prospect Theory Can Transform Your Executive Conversations

Posted by Conrad Smith on Nov 23, 2016 11:48:02 AM

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prospect-theory.jpgAll of you road warriors have lived through this. I was in the airport terminal last week getting ready to board my flight home, when an announcement came from the customer service desk: The flight was overbooked. The airline was looking for a volunteer to give up their seat and take a later flight home, in exchange for a $500 voucher they could apply to their next trip.

For a small inconvenience—the next flight to the same city was leaving in a few hours—the airline would give some willing passenger the chance to make a significant monetary gain. And yet the announcement was made, and it was followed, predictably, by crickets. No one budged. “Thanks, but no thanks,” was the collective mood in the terminal. Everyone there, myself included, was just fine with the ticket we already had. All of us had made the calculation that what we had in our pockets—a ticket home at the time we’d planned for—was more valuable than a small delay, plus a $500 voucher that might cover much or all of the airfare for our next trip or vacation.

This scene in the terminal is loss aversion in action.

Let me explain why understanding how this principle works can transform how you engage with executive decision-makers—and how new research proves it.

Prospect Theory

When the social psychologist duo Daniel Kahneman and Amos Tversky tested the concepts of loss aversion (our resistance to losing what we have) and risk-seeking (our willingness to take risks), they reached a fascinating conclusion about decision-making: They found that humans are two- to three-times more likely to make a decision to avoid a loss than they are to make a decision to attain a gain. This is known as “Prospect Theory.”

So, what many airlines may not know when they ask volunteers to give up their seat on an overbooked flight is that they’re actually trying to override a powerful decision-making instinct. When humans have something, they are none too inclined to give it up—even if “the math” says they should.

Some of my Corporate Visions colleagues and I found the concept of Prospect Theory compelling, but were still wondering how much of an influence it had on executive decision-makers, long regarded as strictly rational people, unswayed by emotions.

Collaborating with Dr. Zakary Tormala, an expert in messaging and social influence, we recruited 113 executives from a range of industries and asked them to participate in an experiment designed to test whether Prospect Theory applies in an executive selling context. Turns out, it does—big time. What the experiment also showed is that you can make an emotional impact with executive decision-makers that can sway deals in your favor…but only if you frame your conversations appropriately.

In one of the three scenarios we tested, we split participants up into “loss frame” and “gain frame” conditions, where they either had something to lose or something to gain. The executives in the gain frame condition were instructed to imagine there was one bottle of their favorite wine—a rare vintage—in a local shop. Meanwhile, participants in the loss frame condition were told to imagine there was one bottle of their favorite wine, also quite rare, in their cellar. Participants in the first group were asked to indicate how much they’d pay to buy the bottle in the wine shop, while participants in the second group were asked to indicate how much they’d be willing to sell their bottle for.

The executives in the first condition were willing to pay, on average, $173 for the rare bottle of wine. But participants in the second condition said they were willing to sell their rare bottle of wine for a whopping $1,950. Quite a difference!

There is nothing rational about that reaction. What this strongly suggests is that executives are nothing like the emotionless, math-focused robots that the old stereotypes suggest.

Why does this matter to marketers and sales pros? When you’re the outsider trying to convince an executive to switch from their incumbent to your solution, you have to overcome their deep emotional objections to the idea of doing something different than what they’re doing today. When you’re the outsider, you represent a business risk.

The big breakthrough finding from this experiment—which tested two other scenarios in addition to the one above—is that you don’t have to rely strictly on numerical value propositions to make your case. Your messaging matters. Emotions and intuitions clearly have a major influence on the decision-making process.

Your ability to convince executives to take a perceived business risk and change to your solutions could come down to your ability to apply the knowledge of Prospect Theory to your customer conversations—showing executive buyers not what they stand to gain by switching to you, but what they stand to lose if they don’t.

Want to learn about the other business and personal decision-making scenarios tested in the study? Check out the research brief.

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Conrad Smith

Conrad Smith

About the Author

As the Vice President of Consulting Services at Corporate Visions, Conrad Smith helps companies develop and deliver customer conversations that win.

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