Prospect Theory: Examples from Big Tech

Prospect theory tells us two key things about how people make decisions:

• People prefer sure wins.
• When facing a loss, they're more likely to take risks.

This article explains prospect theory with simple examples and shows how big tech companies leverage it in their strategies.

1. Prospect Theory Example Experiment
2. Prospect Theory in Big Tech

1. Prospect Theory Example Experiment

Kahneman and Tversky demonstrated their theory through multiple experiments. In a standout experiment they presented two groups (N=138) with distinct gambling choices, each having the same expected outcome.

Group 1 - Potential Gains

Option	Starting	Odds	Expected	Preference
A. Certain Gain	$1,000	Certain $500 gain	$1,500	Preferred
B. Gamble	$1,000	50% chance of $1,000 or $0 gain	$1,500	-

Insight: 84% favoured Option A over Option B. This indicates that the fear of missing out on a sure gain outweighs the temptation of a bigger, uncertain gain.

Group 2 - Potential Losses

Option	Starting	Odds	Expected	Preference
C. Certain Loss	$2,000	Certain $500 loss	$1,500	-
D. Gamble on Loss	$2,000	50% chance of $1,000 or $0 loss	$1,500	Preferred

Insight: 69% preferred Option D over Option C. This suggests that faced with certain losses, the chance to avoid a loss is so appealing that many are ready to risk even bigger losses.

2. Prospect Theory in Big Tech

Here are examples of how prospect theory principles can be revealed in the successful tactics of leading tech giants. These strategies exploit our aversion to loss.

Company	Strategy	Description	Prospect Theory
Amazon	Prime Free Shipping	Prime members get free international shipping, deterring them from competitors such as Alibaba even if total cost might be lower elsewhere.	Certain free shipping gain ✅ or Chance of cheaper total cost ❌
OpenAI	ChatGPT Upgrade	Premium users access the advanced GPT-4 model. The Fear of Missing Out on superior answers to others drives upgrades, even if GPT-3.5 suffices.	Certain poorer answers ❌ or Chance of improved answers ✅
Google	Promotional Google Ad Credits	New advertiser customers enjoy a traffic boost with ad credits. When depleted, many continue advertising despite uncertain ROI.	Certain traffic boost gain ✅ or Chance of declining traffic ❌

Reference:

Kahneman, D., & Tversky, A. (1979). Prospect Theory: An Analysis of Decision under Risk.