Prospect theory, by Kahneman and Tversky.
It’s common to assume that the decision to use a new product (or otherwise) is a rational one.
In the minds of most, the sequence goes like this:
You hear about a product (somehow) You evaluate it according to your own situation and current needs You decide it either would or would not benefit your life You make the change
This is exactly how the process of new product adoption was understood for decades thanks to a surprisingly influential, but now forgotten, academic named Everett Rogers.
Rogers developed many frameworks and methodologies in his time. The most enduring has been the ‘Innovation Adoption Curve‘, which categorises adopters of new products into 5 types. Yes, it was Rogers who coined the term ‘Early Adopter’ and paved the way for Moore’s chasm.
Less well known is his Five Factors framework that identifies 5 drivers of new product adoption:
Relative Advantage Compatibility Complexity Trialability Observability
All the factors touch on the psychology of the user, but it’s the first that distills the essence. Framed within the context of ‘innovation’, Rogers concluded that new products won for the following reason:
Innovation should demonstrate a relative advantage over other options, ideally including the technology currently used for the task. Better technologies will be adopted, plain and simple.
So, the better product wins. Pretty obvious, right?
It was, until Princeton psychologist Daniel Kahneman trampled on Rogers’ theory with the conclusions of a number of experiments he conducted in the 70s and 80s. These experiments showed definitively that our decision-making in respect to new products is distinctly irrational.
Kahneman called his new thinking ‘Prospect Theory‘ and was awarded the Nobel Prize in Economics in 2002 for his efforts. Most of us now know him from his 2012 blockbuster ‘Thinking Fast & Slow‘.
It’s worth all Product Managers being aware of the key principles which define Prospect Theory and underpin the field of behavioural economics.
They are:
Outcomes are judged in terms of ‘gains and losses’ Gains and losses are relative Losses loom larger than gains
In contrast to Rogers, Prospect Theory is adamant we don’t assess outcomes absolutely according to some internal calculation. Instead, we view things in terms of ‘losses’ and ‘gains’.
Those losses and gains are benchmarked according to existing reference points which differ according to our current situation.
And we really hate to lose the things we have already.
In fact, we fear to lose what we have up to 3 times more than we value potential gains, a perspective is commonly known as ‘loss aversion’. Time is also a factor. Losses, financial or otherwise, are almost always felt immediately. Gains, on the other hand, are usually delayed.
The consequences of Prospect Theory are of profound significance to new product developers. For Kahneman showed us that the best product doesn’t always win. In fact, the odds are stacked against new products breaking through at all.
Behavioural economist Richard Thaler coined the term ‘Endowment Effect’ to explain why. Put simply, we value things we already have far more than things we don’t.
Product change and new product adoption usually require behaviour or state change on the part of the user. And with these behavioural changes comes resistance. Resistance to giving up old benefits and resistance to incurring new costs.
The greater the required changes, the greater the potential resistance. Endowment Effect implies that we hate change as much as we hate losing things. So the net result is that, more often than not, we choose not to make either.
The key question all product developers need to ask is:
#1 How much change are we asking of the user?
To make matters worse, product developers tend to overvalue the benefits of their creations.
This compounding of biases leads to what Harvard’s John Gourville has dubbed the 9x Problem:
A mismatch of 9 to 1 between what innovators think consumers want and what consumers actually want.
To help product developers counter the 9x Problem, Re-Wired’s Bob Moesta has developed the Progress Making Forces model. Bob is one of the prime movers within the Jobs to be Done (JTBD) school of thinking. JTBD advocates believe people hire products to make progress in their lives. Understanding those desired outcomes is, in their view, critical to effective product development.
The Progress Making Forces model analyses the psychology of a person who is considering a new product in terms of the opposing forces they experience at the time.
Two forces incline one towards making the change and adopting the product, and two forces pull one back towards the status quo. Dissatisfaction with the current solution and the appeal of the new incline us towards the status quo. Uncertainty and habit pull us back.
It’s important for product developers to ask what the struggle is that their ideal user is experiencing and what progress they are trying to make in their life.
Key questions here include:
#2 What solutions are they employing to achieve the outcomes this product will help them with?
#3 What do we expect someone to stop doing in favour of using this product?
The last question is particularly important and often overlooked. Time is finite but one’s options for spending it are infinite:
#4 What activity will be displaced by using this product?
Originally published at www.notioncapital.com on May 11, 2017.
