# How To Use Prospect Theory To Create New Habits

## Lessons from a Nobel prize winner

Imagine me offering you the following bet:

`A: 90% chance to win \$1,000 orB: Sure chance to win \$800`

It is very likely that you chose B? Although the expected value of A is \$900, which is \$100 more than that of B (\$800), most people choose to go with the safe option i.e. B.

Now, consider another bet:

`A: 85% chance to lose \$1,000 orB: Sure chance to lose \$800`

Would you still choose B? The expected value (loss) of A is \$850, which is \$50 more than that of B. However, when there is a high probability of losing money in a bet, people are more likely to take the risk instead of choosing a 100% probability — unlike the first bet.

### What’s Prospect Theory?

Mentioned above were examples of risk attitudes as described in the prospect theory by Nobel Laureate Daniel Kahneman. The theory has provided a more accurate description of our attitudes towards gains and losses. The following table depicts the fourfold pattern of risk attitudes:

A very simplistic explanation of the backbone of the prospect theory is this:

A specific amount of loss hurts us more than the same amount of gain would delight us.

After I let the theory hurt my feelings by telling me that I’m inherently irrational on account of being human, I was constantly thinking about how the above-mentioned pattern of risk attitudes might guide our choices in important life decisions.

Not surprisingly, I came across a plethora of examples of how all kinds of decisions — small and big — were guided by the table shown above. This was great news, because it was a flaw in my decision-making system that I was eager to exploit. I hypothesized that I would be able to increase my goal commitment by simply re-framing a goal in terms of potential losses rather than potential gains — and then put this notion to the test.

### How To Reframe Your Goals Using Prospect Theory

It was a simple experiment. I was going to frame two goals — daily meditation for ten minutes and writing in my diary — as approach-oriented (i.e. “I want to achieve X”) and pursue them for a week, recording my subjective evaluations of my goal-commitment on a scale of 1 to 10 every day. After the completion of one week, I would re-frame only my first goal — daily meditation — as avoidance-oriented (i.e. “I want to avoid failing at X”) and repeat the process of recording goal-commitment daily for another week.

After two weeks of testing, the results were as follows:

`Week 1 (both approach-oriented): `
`Goal 1 commitment (avg.) = 7.42/10 `
`Goal 2 commitment (avg.) = 7.14/10`
`Week 2 (only goal 2 approach-oriented):`
`Goal 1 commitment (avg.) = 8.28/10`
`Goal 2 commitment (avg.) = 7.00/10`
`Increase in goal commitments (%):`
`Goal 1 (re-framing done) = +11.6%`
`Goal 2 (no re-framing done) = -2%`

An 11.6% increase in goal-commitment with an intervention as simple as re-framing your goals is, in my opinion, a significant one. Thus, I’ve decided to continue applying this method of re-framing objectives — and expect for a favorable outcome in the long run as well. However, there is a key concept which is crucial to the effectiveness of this intervention: maintaining and raising personal standards i.e. reference points.

For example, when I set an approach-oriented goal to meditate, this is how I framed it:

I want to successfully meditate every day for ten minutes.

After re-framing it as an avoidance-oriented goal, here’s how it looked:

I want to avoid failing to meditate every day for ten minutes.

In the first case, the reference point is my current state, the state in which I do not meditate daily and would like to. This state becomes my current standard, which I intend to improve. In the second case, the reference point is the desired state, the state in which I meditate daily. This becomes my standard, a higher one which I intend to maintain.

Clearly, to switch from approach-oriented goals to avoidance-oriented goals, we must first increase our standards, because, in this context, if there’s no standard to maintain, there’s no failure to avoid. This reminds of a quote from Michael Jordan:

“You have competition every day because you set such high standards for yourself that you have to go out every day and live up to that.”

### Potential Shortcomings Of The Method

While this approach has worked for me, there are a few potential holes in my hypothesis and experiment:

1. The success of the re-framing intervention is overly dependent on the appropriate setting of personal standards.
2. Despite my rigorous efforts to keep the evaluation of my goal-commitment as objective as possible, it is still likely that my judgement was biased to a small extent.

### Conclusion

Since it has only been two weeks, I don’t want to put a “works-in-the-long-term” stamp on this method yet. However, I would definitely urge you to give it a shot, given how effective it has been for me. If I stumble upon any important observations, I’ll be sure to add them down below.