How do consumers make decisions when faced with risky choices? 📈
When people have to choose between different options that involve risks, we often make decisions in ways that are influenced by how those options are presented.
Research Study: Risky Choices in Monkeys and Humans
Researchers from Yale University research explore how monkeys and people make risky decisions.
In this study, the researchers conducted two scenarios related to trading tokens for grapes. In the first scenario, there were two options: a ‘safe’ trader who always gave two grapes, and a ‘risky’ trader who sometimes gave one grape and other times gave three grapes. Interestingly, both people and monkeys tended to choose the safe option in this scenario.
Moving on to the second scenario, both traders held three grapes each. The monkeys are familiar with the behavior of the first trader, who consistently provides the same outcome. However, despite knowing this, when the monkeys choose the first trader, they receive only two grapes and they witness one is taken away. On the other hand, the second trader, known for being unpredictable, occasionally gives all three grapes but also takes away two grapes, leaving only one for the monkeys.
Surprisingly, the monkeys opt to trade with the ‘risky’ second trader. As the monkeys could potentially get more grapes with the ‘risky’ trader, even though there’s a chance of receiving less or even losing grapes. This behavior highlights a trait shared by both humans and monkeys: a preference for taking the possibility of a larger reward, even if it means facing a potential loss, over choosing a sure but smaller gain. This insight underscores our aversion to losses and our willingness to take calculated risks for the prospect of greater gains.
The Framing Effect in Decision-Making
In human decision-making, we often make different choices when risks are described in different ways—a phenomenon known as the “framing effect.” When options are described as potential gains, we tend to be more cautious and risk-averse. However, when the same options are framed as potential losses, we become more willing to take risks.
The Psychology Behind Our Aversion to Loss
The tendency to change our attitude towards risks are greatly influenced by how they are presented.
In our daily life, we can pay attention to how our decision making processes are affected. For example, when investors make decisions, they tend to make more risky decisions if they are presented with a prospect of losing.
During sales events with a limited timeframe, consumers often tend to purchase a greater quantity of products when they are confronted with the possibility of losing out on the opportunity.
We hate to lose and we’ll take the possibility of a bigger win versus a sure loss.
