Tversky, Trump, and Unintended Consequences

Bad things can happen when people see no upside.

The 2016 election has produced a president-elect who is…unorthodox.

Donald Trump’s election, however, is quite possibly the result of one of the most important quirks to human decision making ever discovered.  Namely, that people are risk seeking when faced with certain losses.

That’s right–when our back is to the wall, we tend to roll the dice.

In a series of experiments years ago, the late, famous psychologist Amos Tversky and his collaborator Danny Kahneman delineated Prospect Theory.  Among the key outputs of Prospect Theory was the notion that people are protective of gains…we like sure gains over gambles even if the gambles are expected to pay off more than the sure thing.

But, we are very willing to speculate when it comes to sure losses.  We will take the prospect of a gamble that results in a big loss or no loss at all over a certain smaller loss. Back us to the wall, and we roll the dice.

It’s arguable that such a psychological phenomenon drove the election of Donald Trump, who represents tremendous uncertainty when it comes to things that matter (like policy…I’m not talking about his tendency to Tweet). Things may just work out great, but we don’t know yet.

A large enough proportion of the electorate was backed into a position where voting for Trump’s opponent was a sure loss–a vote for a status quo that wasn’t really working for them.  Instead, they had the option to roll the dice on an option that might just break even.  So, they did…in droves.

You could argue–and Monday morning quarterbacks of the election have done so–that by disregarding wide swaths of the electorate who saw only continued decline coming with a vote for Hillary Clinton, the Democrat party backed those people against the wall.

Kahneman and Tversky showed us that if we put people in a lose or gamble situation, they will gamble. They will gamble even if the loss is only modest (in this case, simply the status quo of steady opportunity erosion).

So, what’s the insight for you as a leader?

From an organizational perspective, let’s say you are an executive or a board member who wants to “send a message” to an organization.  Maybe that message looks like a substantially more challenging compensation structure–you raise target performance by 50 percent, cutting likely compensation for executives by 25% in the process.

What you’ve done is sent a message to them that says “you are going to lose compensation this year.”  Remember that when faced with a sure loss, people are much more likely to roll the dice and move on. Expect lots of people, especially good ones with other prospects, to check out.

From a strategic business perspective, the same can happen.  If your strategy is to drive your competition to the brink, then you must know that competitors will roll the dice when at the brink.  Good conduct consists of avoiding backing the competition into the wall unless you know the endgame.

It might feel good to back them to the wall; but be ready for their gamble if you do.

What do you think? 

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