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You are here: Home / Compensation Plans / Ask Victoria: What Is Prospect Theory?

Ask Victoria: What Is Prospect Theory?

April 7, 2014 By admin Leave a Comment

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.

  1. In your compensation plan, focus on the gains to be won with each promotion.
  2. 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.
  3. 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.

Filed Under: Compensation Plans, Recognition Tagged With: compensation, prospect theory

About Jay Leisner

P15Jay Leisner, the President of Sylvina Consulting, is a top compensation plan and direct selling expert, a trusted adviser to new and established network marketing and party plan companies. For more than 30 years, Jay has enjoyed assessing and improving network marketing, party plan and referral marketing companies across the globe.

Direct Selling Startup GuideJay Leisner and Victoria Dohr authored the top-rated book for new and young network marketing, referral marketing, and party plan companies, "Start Here: The Guide to Building and Growing Your Direct Selling Company".

Available in English and Spanish. This startup guide contains 250 pages of wisdom that will guide you through the right steps to start and continue on your journey to build a successful direct selling company.

You will save thousands of dollars and hundreds of hours of your time using the information you will read in our book.

In 1986, Jay began his career in direct selling by working for a major direct selling software provider. First as a software developer and later as a project leader and a business analyst, Jay worked closely with new and established network marketing and party direct selling companies to provide them with software solutions to meet their unique requirements.

Jay contributed in many ways to the success of large implementation projects for many companies. Jay also worked with dozens of smaller companies to assist each of them in various capacities to provide them with the systems they needed to help their businesses to grow faster.

Along the way while working with them, he learned the secrets of successful direct selling companies and the challenges faced by them. In true entrepreneurial spirit, Jay’s decision in 1999 to start Sylvina Consulting as a direct selling consulting company was driven by what he saw was a need for answers, advice, and solutions.

In 2004, 2006, 2009, 2014, and 2018, Jay gave presentations on compensation plans, recognition, and field leadership development at conferences held by the US Direct Selling Association.

He traveled to South Africa in 2015, 2016, and 2017 to conduct workshops on compensation plan design and recognition programs for member companies of the South African Direct Selling Association.

In 2017, Jay spoke at the Canadian Direct Sellers Association Meeting on the importance of recognition.

More than just a compensation plan expert, Jay is exceptionally skilled at advising new and established companies on business strategies. Before offering advice or solutions, he asks important questions to understand each client’s specific concerns and goals.

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