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In the last few weeks I have been studying about Daniel Kahneman and Amos Tversky famous Prospect Theory. This theory has many applications and many interpretations. One of the most important of these interpretations is that losses loom larger than gains. Meaning, all else being equal losing something will hurt us more than winning the same amount (when I say amount it is not necessarily money. It could be joy, pain or anything that has value to us). If you look at the graph that represents this theory, you would notice how the graph is steep at the beginning in both directions, but steeper in the loss area.
One of the insights of this idea is that we need to aggregate pains but segregate gains. In other words, when we talk about gains, it is better to be closer to the zero point of the axis but in the case of loses it is better be as left as possible on the graph.
Imagine going to the dentist. You need to take a four-hour operation. Your dentist offers you to do it in two sessions of two hours or in one session of four hours. Prospect Theory suggests, maybe counter-intuitively, that it is better for you to have a 4 hour operation than a two hour one.
That got me thinking about how this idea is manifested in managerial environments.
Have you ever heard the advice to celebrate small victories? Prospect Theory suggests that this is very good advice. However, in many managerial setting we are so busy dealing with current issues that we forget to celebrate small successes. We wait to the end of the period and have a huge event celebrating the last year. However, celebrating frequently turns out to be a much better way to in recognizing people’s efforts. So, instead of giving them a week off at the end of the project, give them 5 days over the duration of the project, as a reward for good work. Instead of throwing a huge party that will cost you 100,000$ dollars at the end of the project, have ten parties with a cost of 10,000 every now and then. This approach also seems to coincide with Dan Pink’s advice in Drive, that rewards should follow a “now that” pattern instead of a “if then” pattern.
I know that these examples are to literal a translation of the theory and that in real life, things work a little differently. However, I do believe that by understanding the idea of gain segregation, we can make our efforts to engage and recognize employees much more effectively and allow them, without changing our cost structure or the total sum of what they are gaining, to enjoy more of what we are already giving them.
How do you think the ideas of loses aggregation and gains segregation play out in our managerial decisions?