A or B?
In honour of Daniel Kahneman, Nobel Prize winner and author of the brilliant book: ‘Thinking Fast and Slow’ who died last week, I share an exercise I learned from him that I’ve adapted and run with hundreds of business owners and senior directors over the last two decades – the relevance of which is still as powerful today.
Imagine you’re in a casino and you are £1,000 up. You have 2 options:
A. One more hand with an 80% chance of winning £1,500 in total AND a 20% chance of winning nothing, you leave with what you started with.
B. You leave with your £1,000 winnings.
Now whichever way you chose, you return to the casino on another evening and face a different scenario.
This time, imagine you are £1,000 down. You have 2 options:
A. One more hand with an 80% chance of losing £1,500 in total AND a 20% chance of losing nothing, you leave with what you started with.
B. You leave with your £1,000 loss.
Did you select A in both scenarios, or B in both scenarios, or A in one and B in the other?
With live audiences I find that on average 80% of people choose B. in scenario 1 and A. in scenario 2.
But why is that? Why do people make different choices when the sums of money involved are the same.
The answer of course, is the difference between how many of us respond to gain or loss. Lots of people will take bigger risks to avoid losses than to further gains.
This difference in decision making applies to business as well – resulting in many poor investment decisions and also with procurement, hiring, marketing and much more.
The “cure” is to work out what your appetite to risk is and then to stick to one approach. But as many a gambler will confirm, that’s easier said than done.
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