Why Biz Op Distributors Fail to Recover Their Losses
Kahneman and Amos Tversky are well known for their interesting puzzles in rational choice and their clever challenges to rational choice theory.
Typically, their examples involve seeing the same problem from two different perspectives which draw out two very different choices.
Here is one of my favourite examples.
Consider the following problem. In a population of 600 individuals, serious viral infection has taken place. There are two courses of action possible.
A: You can cure 400 individuals for certain.
B: You can cure 600 individuals, but with only 75% certainty.
As you are thinking about your decision, a new medical program becomes known. It offers the following choices.
C: You will doom 200 individuals for certain.
D: You will doom no individuals, with 75% certainty.
Which do you choose, A over B and D over C? This is the typical choice pattern. Faced between curing 400 people for sure and a 25% chance of failing to cure anyone, take the sure thing. But when faced with having to lose some individuals, perhaps it better to take a risk to save everyone.
Now it takes no great imagination to see that choice A is the same a choice C, and B is the same as D for a population of 600. If you cure 400 people for certain, then 200 people were doomed for certain. The same with with B and D.
But having seen the equivalence of A and C and B with D, it is still hard to resist the framing effects: when faced with sure gains, be risk adverse; when faced with sure losses, be risk seeking.
Why is this relevant to distributors who have lost money in business opportunities scams?
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Ironically, it is completed reversed.
Prior to losing their investment, the distributor treats the earnings claim made to him or her like a sure thing -money in the bank. But instead of being risk adverse, they are risk seeking looking to expand the size of their distributorships. Once they have lost their money, they become risk adverse failing to put any money together as a group to recover their losses.
Technorati Tags: rational choice theory, daniel kahneman, nobel prize, doom, choices, typical choice, viral infection, professor daniel, amos tversky, vernon smith, medical program, new medical, clever, puzzles, perspectives, economics
