Daniel Kahneman

Lessons from a Nobel prize winner

Imagine me offering you the following bet:

A: 90% chance to win $1,000 or
B: 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 or
B: 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.

Sources

  1. Prospect Theory: An Analysis of Decision Under Risk
  2. Thinking, Fast and Slow

How To Use Prospect Theory To Create New Habits was originally published in Better Humans on Medium, where people are continuing the conversation by highlighting and responding to this story.

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