# Executive summary of “Choosing the sure gain and the sure loss: uncertainty avoidance and the reflection effect”

Graham Cole (Freelance writer)

ISSN: 0736-3761

Publication date: 11 August 2014

## Abstract

#### Citation

Cole, G. (2014), "Executive summary of “Choosing the sure gain and the sure loss: uncertainty avoidance and the reflection effect”", Journal of Consumer Marketing, Vol. 31 No. 5. https://doi.org/10.1108/JCM-08-2014-1099

### Publisher

:

Emerald Group Publishing Limited

## Executive summary of “Choosing the sure gain and the sure loss: uncertainty avoidance and the reflection effect”

Article Type: Executive summary and implications for managers and executives From: Journal of Consumer Marketing, Volume 31, Issue 5

This summary has been provided to allow managers and executives a rapid appreciation of the content of the article. Those with a particular interest in the topic covered may then read the article in toto to take advantage of the more comprehensive description of the research undertaken and its results to get the full benefit of the material present

An important research finding is the tendency for people facing uncertainty to use different strategies to guide their decision making. Evidence suggests that individuals who rate high in uncertainty avoidance (UA) are more likely to attempt to lessen any risks wherever possible.

Risk and avoidance are generally perceived as closely related. However, the impact of UA on risk has not been explored to any significant degree. Certain scholars point to the “reflection effect” component of the Prospect Theory to propose that consumers are prone to avoid risk in relation to gains but accept risk where losses are concerned. A key tenet of this approach is that the impact of loss on people is greater than that of gain. Probability is likewise relevant. When people are weighing the likelihood of something occurring, they are inclined to underestimate larger probabilities and overestimate smaller ones.

Problem 3 from the Prospect Theory is used to illustrate the tendency. Option A involves a certain win of US$3,000 and there is an 80 per cent chance of winning US$4,000 with Option B. Consumer evaluation of probability means that Option A is more likely to be chosen. With regard to Option B, they will overrate the 20 per cent chance of winning nothing and underrate the 80 per cent prospect of winning US$4,000. The theory also posits that consumers also measure risk through the value of the attribute being considered and in this case will perceive little difference between the two monetary amounts. The reflection effect describes the risk reversal which allegedly occurs when these same options are used in respect of losses. With Option A there is a definite loss of US$3,000, while there is an 80 per cent of losing US$4,000 with Option B. In the loss situation, the theory predicts that Option B will be preferred. Again, little difference will be perceived between the amounts. It is proposed here that the 80 per cent possibility of losing US$4,000 will be underestimated by consumers, who will likewise overestimate the 20 per cent chance of losing nothing.

Mixed findings have emerged from studies into the reflection effect. It has thus been assumed that the reflection effect might be subject to moderation from certain individual, social and contextual factors. One study found that the reflection effect was reversed when gains were framed as opportunities and losses as threats. Different researchers found that the same pattern emerged when people compared the gains and losses experienced by others. On the contrary, it was noted that the reflection effect was stronger among people whose actions relied on senses rather than intuition, and judgments instead of perceptions.

In the current study, Chatterjee et al. explore the impact of UA as an individual difference variable. It is expected that the rationale applied by those rating high in UA will mean that they choose the “sure option” where both gains and losses are concerned. This is because of the high value such individuals place on certainty. The authors believe that UA and Prospect Theory produce similar effects in the loss context and propose a “dual mediation mechanism” for how higher UA individuals perceived losses. They point out their “desire for certainty” which then makes the sure smaller loss more appealing that the potentially larger one. Fear of this higher loss persuades the consumer to remain committed to the original choice to opt for the sure loss.

Correlation exists between risk and uncertainty but different scholars point to a key conceptual difference. Whereas risk is connected to a specific event and is “represented by a certain probability”, the consequence for uncertainty is not specified in the same way. Risk thus generates apprehension about an event and uncertainty gives rise to concern about the different possible outcomes. Previous work determined that UA and risk aversion impact on different stages of consumer decision making. Whereas UA affects upstream information search, the impact of risk avoidance affects downstream information evaluation when it is possible to compare the risks that different options contain.

The authors examine these key factors in three studies involving different groups of undergraduate students. In Study 1, subjects completed a two-section booklet. The first asked for responses to statements pertaining to UA, risk and risk avoidance. In the second section, participants were asked to indicate their choices in relation to Problem 3 outlined above. It was acknowledged that those rating higher in UA might process information more deeply because of the sure loss being lower than the riskier loss. In addition, the within-subjects design used in the study might have been significant. The large monetary amounts used could also have prompted higher levels of scrutiny among participants.

These potential issues were addressed in Study 2, where a between-subjects design and varying stakes were used. Similar information was requested from participants who then indicated their preference when faced with a 90 per cent likelihood of winning or losing US$3,000 against a 45 per cent chance of winning or losing US$6,000, as per Problem 7 of Prospect Theory. The study format incorporated one of the two problems combined with large or small stakes and gain or loss. Based on UA, respondents were organized into higher and lower groups.

Study 3 aimed to test for the dual mediation mechanism using a booklet containing three sections. The first section involved making a choice between the sure US$3,000 loss and the 80 per cent chance of a US$4,000 loss. Statements to ascertain subjects’ decision making process were in the second, while the questions contained in the third included reference to UA items.

From these studies, it was indicated that:

• Subjects in the higher UA group were more inclined than those in the lower UA group towards sure gain and sure loss rather sure gain and risky loss.

• Where gains are concerned, both higher and lower UA consumers show similar tendencies in preferring certainty over risk.

• Compared with lower UA individuals, higher UA consumers will select risk less often than certainty with regard to losses.

• Those rated as higher UA will commit to a sure loss over a risky loss. They will stick with this choice as they find the certain smaller loss more attractive than a potentially larger one.

Chatterjee et al. noted that higher UA consumers exhibit some characteristics typical of “prevention-focused” individuals. They suggest future study could examine the impact of prevention or promotion tendencies on the relationship of UA and the reflection effect.

Consumers rating higher in UA are less inclined towards innovation and thus demonstrate resistance to new products. In the authors’ view, offering price discounts might provide a way to address this opposition to change. They propose a method whereby the ideal discount-risk ratio might be determined. Another observation is that reluctance to try new products might likewise be driven by a fear of losing more. Consequently, it is mooted that marketing appeals focusing on “protection of harm” will probability be more successful than those promising gain.

The strong risk aversive propensity of higher UA consumers might increase their susceptibility to future risks. An example of this would be taking antibiotics as a precaution and inadvertently increasing possible future risks caused by possible resistance to the medication’s beneficial effects.