Risk Management

Having More Options Can Make You Evaluate Risk Differently

Think about when you go shopping: Do you often buy a 3-in-1 shampoo, conditioner, and body wash in a single bottle, or do you instead seek three distinct products, believing they will do a better job (whether or not its true)? In an article for Harvard Business Review, Uzma Khan and Daniella Kapoor explain that such perceptions have a dramatic effect on risk and decision-making in business too. Are you falling into a bias trap?

Less Is More (Valuable)

In doing business, this concept is crucial as organizations want to convey how attractive or unattractive an option is. Knowing how to create a perceived value that leads customers to willfully take a risk and view it as attainable is key. People are less likely to do something when they believe the benefits are somewhat “unrealistic” and vice versa.

In the authors research, when being shown different travel insurance offers, most participants preferred offers that covered serious injuries versus others that covered serious injuries, flu, and a minor cold. Adding more benefits to make a “prize” more valuable can thus end up backfiring and decreasing the perceived value of that prize. What we can learn from this seeming nonsense is that people tend to lean toward the safest or most practical option given various offers and try to avoid the higher risk of not getting any or less benefits.

Humans are hard to understand, but all these ironies mean a lot of things to marketers and policy-makers. Well-intentioned strategies can backfire if you don’t put yourself in the shoes of buyers and customers to understand their psychological thinking: People want the best opportunities, but they also want something that feels inherently believable, achievable, or has fast effects. Adding ancillary small benefits to an already great option can make it less attractive, and adding smaller consequences to an already big risk can make the big risk feel less likely to strike.

The authors share one more example of good intentions being thwarted by customers’ perceptions:

We found people generally believe that larger, more significant outcomes are less likely to happen than smaller outcomes. But the odds of the larger outcome happening seem even smaller when placed alongside the higher odds of the small outcome. For example, a 10% chance of winning a prize feels small already, but it feels much smaller when it is compared to a 60% chance of winning other prizes. As a result, people feel that they have less chance of winning an unlikely large prize, and that makes the whole sweepstakes feels less valuable.

You can view the original article here: https://hbr.org/2017/02/having-more-options-can-make-us-evaluate-risk-differently

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