6.9 Deal or No Deal
Psychologist and 2002 Nobel Prize laureate Daniel Kahneman never studied economics, but has his own price change-based theory of consumer spending behavior. In the autobiography he wrote for the journal Les Prix Nobel when he won the Nobel for economics, Kahneman essentially argued that people hate losing something more than they love winning it. The way they look at a transaction framed as a loss is very different from how they regard the same deal when it’s framed as a gain. Somebody with a million bucks doubles his bank account if he gets a second million. But that same guy who loses $1 million loses everything.
This doesn’t even have to be about money. A general considers two battle strategies to liberate a village. If one will certainly save 2,000 villagers and another has a 33% chance of saving all 6,000 inhabitants, loss aversion theory, as it’s called, tells us that the general will pick the first scenario. But say the odds are quoted differently. In the first scenario, perhaps it’s certain that 4,000 villagers will perish. In the second, there’s a 33% probability that everybody in the village will be saved, but a 66% probability that they’ll all die. In most cases, the general likely will choose the second option.
Kahneman’s ideas relate more to individual investor behavior, while Prechter’s concern the masses, or tribes, as we’ve defined them. But both underscore the point that while product cycles are comprehensible and predictable, with all apologies to Adam Smith, they’re rarely rational.