In 1979, Daniel Kahneman and Amos Tversky studied how people manage risks and make decisions. Their prospect theory became the foundation of the new field of behavioral economics.
Kahneman and Tversky discovered some interesting results which you can use today to operate your direct selling company better. Here is what they learned:
- People prefer certain results over uncertain ones. They prefer to know exactly what they will get if they do something.
- People evaluate potential gains and losses as changes from their current state rather than as independent situations in the future, and they try to avoid losses more than they try to seek gains.
- People tend to underreact to low probability events. They look at small chance events as having a zero percent probability.
What does this mean for you?
Several gold nuggets can be extracted from prospect theory.
- In your compensation plan, focus on the gains to be won with each promotion.
- Teach your representatives to explain when selling your products or services what could happen if a purchase is not made now. Their customers will be more likely to buy if you explain a potential loss, than if you focus on a future benefit.
- Don’t use a lottery or “top 10” approach for your recognition programs, because the requirements to win aren’t certain. Instead set specific requirements.
Would you like more answers from Victoria Dohr? Visit the Ask Victoria archive.