Prospect Theory + Product Design

People are irrational, they don’t make decisions that seem to make sense for themselves. They use products in ways designers and developers don’t expect- so we have to get used to predicting for the unpredictable, irrationality.

Prospect theory is a theory of how people perceive choices- named by Daniel Kahneman and Amos Tversky as a psychologically more accurate description of decision making, compared to the expected utility theory, in the paper “Prospect Theory: An Analysis of Decision under Risk” (1979).

Prospect Theory 101

Prospect theory is a huge part of the skeleton of behavioral economic theory (all those other things like anchoring, default bias, preference bias), so it’s worth digging in for a hot sec.

There’s a lot of deep economic theory behind it, but here’s the general idea:

Imagine that you are a person making a decision that involves potential gains and loses. Let’s say you’re thinking of investing some money into a friend’s company. You’re trying to weigh the pros and cons, and figure it out.

Under rational economic theory, you would equally weight any amount of increase or lose- losing $100 would be 10 times worse than losing $10, and gaining $100 would be as good as losing $100 is bad.

But um hi we’re not rational.

Kahneman and Tversky realized thing don’t really work like that, and created the Prospect Theory model as a way of describing what people actually do.

The Big Ideas:

• People dislike losses more than they like gains. Losing even a tiny bit feels super shitty, so we try to avoid it extra. Losing sucks.
• As much as we all think we just want to win a million dollars, our expected value from gaining maxes out pretty fast. Winning $100 feels awesome, and winning more just feels a little more awesome.

Designing with Prospect Theory in Mind

Know where your users begin

The whole concept of prospect theory revolves around where the user exists- their reference point. Everything is relative to their existing state of being- and we’re not just talking money. Your users are full people with hopes and desires and quality of life. If you want them to change their lifestyle, encourage them to use your things, and give you money, you better understand where they are to begin with.

Let’s say you’re designing a fitness application that’s supposed to help people workout more and get healthy. Imagine two different users- John, an out of shape, overweight guy who’s never done anything like this before, and Julie, a relatively fit gal who works out 4 times a week. John and Julie are coming from very different reference points, thus their expectations and perceived risk/ rewards will be super different.

Front-load reward, delay loss

Hitting people with a loss early on in their experience with your product or service can be highly detrimental in engagement, retention and your relationship. For example, a really long sign-up form that asks them uncomfortably personal and frankly difficult questions- before they even know if they really want it! Instead, make the early parts of the onboarding experience fun and satisfying, giving people the little bits of joy that will keep them going.

Spread out Gains, Consolidate Losses

A single positive moment can only go so far- aim to spread out the moments where your user is having a positive experience to make them feel even better. On the flip side, if you have a part of the experience that’s less fun, like maybe onboarding, sometimes it’s better to just bite the bullet and get it over with. As long as users are already invested enough, they’d rather get it done than deal with minor annoyances over and over again.

Got some more ideas on this? I’d love to hear.

Read more like this at BehaveDesign- and if you’re a behavioral scientist interested in design, or a designer passionate about behavior, let’s connect!