Decision Making and Rationality – Part 2

Last week we started looking at data from a recent survey I conducted with readers. The goal of the survey was to analyze how people make decisions. To understand a little more of the survey background take a look at last week’s post. This week we’ll start to get into the meat of the survey and explore some interesting things about decision making.

Question 4 on Survey A had to do with gambling and potential winnings: You have an 80% chance of winning $4000, or 100% chance of winning $3000. Which do you choose?

The vast majority, 74% said they’d take the sure bet at 100% rather than gambling a bit for the $4000. Simple math shows in the long run people will win more risking a little (80% x $4000 = $3200 average winning vs. a sure $3000).

On Survey B, question 4 was essentially the same except it had to do with losing: You’re being sued and you have an 80% chance of losing $4000, or 100% chance of losing $3000. Which do you choose?

In this scenario the same dollar amounts are at stake but when faced with the prospect of a sure loss 56% of people are willing to gamble a little to avoid that sure loss. However, if they play the odds they’ll lose less in the long run by just accepting the $3000 loss.

Here’s the point: Everything I’ve read says people dislike loss more than gain, even when it comes to the same amount. In other words, there’s more pain associated with losing $100 than there is joy in winning or finding $100. When it comes to sales, customers will be more motivated to buy if the sales person talks about what the customer stands to lose as opposed to what they stand to gain should they make the purchase.

In the scenarios I set up we clearly see people don’t want to risk losing out on a sure thing. On the flip side, because they hate losing they’re willing to possibly lose even more for a shot at possibly losing nothing. Both decisions by the majority of people fly in the face of conventional logic which the math clearly shows – gamble for more, take the sure loss. That’s important to understand when you have options to present with different risks associated with each.

I think the psychology being described here also tells us why people hang onto losing stocks longer than they should. Quite often if people see a stock in decline they’d be better off selling it and cutting their losses but all too often, too many hang on because they hate the thought of losing and believe the stock might turn around.

Question 5 on Survey A had to do with saving money: You are at a store considering buying a high-end electronic item for $879. While there you learn you can drive across town and get the same item for $859. Will you make the trip (approx. 30 minutes)?

An overwhelming majority, 87% said they would not make the drive.

On Survey B it was also a question about saving money: You are at a store considering buying an electronic item for $79. While there you learn you can drive across town and get the same item for $59. Will you make the trip (approx. 30 minutes)?

This was almost an even split with 49.0% saying they would make the drive.

Here’s the point: Look at both questions again and you’ll see the savings is the same in both case, $20. I find it interesting that half the people are willing to make the drive to save $20 on a $79 purchase but nearly 9 in 10 said they would not when considering the same savings on a big ticket item. Should the price of the item that’s for sale really matter? Why is saving $20 any less valuable use of time for the big ticket item vs. the lower priced item? If you think about it it’s not rational.

I bet most people reading this would drive across town if they heard someone was giving away $20 bills for free (limit one per person) which is really the same as saving $20. As you can see, much of the response is dictated by the set up and what the $20 is compared to. Free is always a big incentive.

I should also point out that I think the current spike in gas prices impacted the response on the low value purchase. If the savings had been more like $30 or $40 I believe the response would have been up by a good bit but I doubt it would have changed too much on the high value purchase.

One final point of note; I’m willing to bet many people taking the surveys would go well out of the way to save 10-15 cents per gallon on gas which might only amount to $20. Interesting.

We’ll continue our look at decision making in next week’s post as we look at more survey questions.

Brian, CMCT
Helping You Learn to Hear “Yes”.
3 replies
  1. Paul Colaianni
    Paul Colaianni says:

    It seems to me that we base saving money on a purchase on what we will have left over, instead of the actual amount we are saving.

    Using your example above, would you not be more inclined to save $20 if you only had a $100 in your pocket? How about if you had a $1000 in your pocket?

    I'd more likely travel across town to purchase the same item at a lower price if I had only a small amount to start with. However, I wonder if you would get the same answers if you told us that we had $1000 in our pocket at the time of that decision (between the $59 item and a $79 item).

  2. Brian
    Brian says:

    That's kind of the point Paul. It's a "compared to what" only my focus was the price, not what you have in your wallet. I think in this day and age because most people used credit or debit the real comparison is price, not cash in the pocket.

  3. Paul Colaianni
    Paul Colaianni says:

    Funny… I guess my perspective is more unique in the sense that I like to pay cash for everything. Probably something that a salesperson could discover about me and utilize in the sale.


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