Someone asks if you’d like to play coin flip? The deal is you put $100 on the table and call to win $200.” Would you play?
Most people (this has been empirically validated) will decline the offer to play even though they stand to gain more than they stand to lose so the expected value of the outcome is obviously positive.
Let’s take it a little further. Suppose the bet was now to be $1,000 to win $2,000. Would you play? Would your decision to play be influenced if you had already won $5,000 in the game? Would your decision to play be different if you had already lost $100 and were now being offered a double of nothing play?
What’s interesting about these questions is the probability of winning (and therefore losing) is the same in every case and yet most people will reject some of the game offers if not all of them when in fact, if they were acting rationally, they would opt to play in all cases.
The way in which people respond to these and other questions has been addressed by Daniel Kahneman, a psychologist and winner of a Nobel Prize in economics for his work on Prospect Theory that deals with decision making under uncertainty and risk. His work in this area has made a huge contribution to decision theory and has been popularized in recent years through his book called Thinking Fast and Slow.
I once taught a class called Management Decision Theory so my interest in Kahneman’s work was piqued when his book was published a couple of years ago. But more importantly his work has direct implications for the way you pitch service proposals to your clients because at the end of the day you are asking them to place a bet on an uncertain outcome and the way you frame your proposal will have a significant impact on the decision your client will most likely come to.
It was only after I took a closer look at Kahneman’s Prospect Theory that I realized the most successful (as in a “yes, let’s go ahead” from the prospect) way for presenting a business development proposal that I had come to, from trial-and-error approach, had a solid theoretical base and therefore greater predictability simply because it is in tune with observable human nature.
I will be talking about this in a webinar on February 12, 2014 so please register if you’re interested in the “science” of improving your conversion rate by clicking here.