For any business, no matter what sector or scale, it is important to understand the behavior of the target audience. For this reason, experts studying economics draw on a variety of disciplines that deal with human behavior. Years before artificial intelligence-supported analyses were talked about, human beings tried to explain the human behaviors that shape the economy with various theories, and this dynamic effort has continued to this day in different aspects. We have explained the concepts of Prospect Theory, which was put forward to make sense of human risky decision-making and evaluation processes, and Loss Aversion Bias, which is an important concept in this theory, in a simple language for businesses.
Positive Prospect Theory
The Missing Missing Fallacy is an example of a fallacy that can be considered as a component of the Positive Probability Theory. Although the concept of the Missing Missing Fallacy is included in the Positive Probability Theory, the two concepts are different from each other. First, let us explain the theory called the Theory of Positive Probability… In 1979, psychologists Daniel Kahneman and Amos Tversky saw the need to put forward an alternative that departed from the assumptions of traditional economic theory and that would explain people’s behavior in a more realistic way, according to the period. Based on their research and studies on the subject, they came up with the Theory of Positive Probability, a theory born out of this need.
In its simplest definition, Positive Probability Theory is a cognitive theory that focuses on the behavioral tendencies of people in making and evaluating risky decisions. The theory explains how people react behaviorally in the face of gains and losses, in other words, how their cognitive evaluations and perceptions progress in their decisions regarding gains and losses. This theory, which is also translated into Turkish as “Expectancy Theory”, is nowadays considered an important tool for understanding the way people evaluate risky situations and their preferences.
The Loss Avoidance Fallacy
As a component of the Positive Probability Theory: The Loss Aversion Fallacy is a concept put forward to explain the perception of risk in human decision-making processes and their preferences or behaviors on the subject.
In the simplest terms, it can be defined as the assumption that people’s tendency to avoid losses is stronger than their desire to gain gains. Accordingly, people may avoid risky situations in order to avoid losses because they tend to feel more pain than the satisfaction obtained with the same amount of gain. This tendency affects people’s decision-making processes and the way they evaluate risky situations.
The Loss Avoidance Fallacy in Business
This fallacy has a stronger psychological impact, as people perceive a loss as weighted more heavily than a gain and tend to avoid losses in risky situations. On the other hand, businesses are considered as legal entities to which the decisions of those who make decisions on their behalf are attributed, so we refer to the decisions made on behalf of the business as business decisions, and these decisions sometimes affect the business behavior and destiny of businesses. In other words, the loss aversion fallacy of the top management making decisions on behalf of the business can become the loss aversion fallacy of the business.
The Theory of Positive Probability can be applied to many areas. Businesses need a more effective management attitude in their decision-making processes as they make many strategic decisions throughout their communication with their interlocutors. Therefore, understanding the behavior of interlocutors in a rational way is of great importance in every sense. It can be effective in the strategic decision-making processes of businesses, for example, in financial decisions, investment choices, insurance purchases, pricing strategies or in various fields such as communication, marketing and sales. Businesses may act with this misconception in an intensely competitive environment, while adapting to new dynamics, evaluating new opportunities or making decisions on risky projects.
While businesses make decisions based on their research to expand their slice of the global and national market or to move towards a new market, they may avoid investment due to factors such as the risks, uncertainties or variability of the market in which they will invest. With the fallacy of missing out, the business, driven at this point by the urge to maintain the status quo, will miss opportunities for growth and competitive advantage. The same issue can arise in the decision to increase or decrease prices. With price increases, the risk of losing customers is taken into account, and with price decreases, possibilities such as the threat to profitability are taken into account. Therefore, businesses may develop a mechanism to protect only the status quo, acting on the fallacy of loss aversion in their short or long term plans due to concerns such as risk damages, growth or indirect/direct loss. This fallacy can lead to reduced profitability or missed opportunities for potential profitability enhancement, but it can also help to reduce and offset the risk of negative outcomes. Strategists making decisions on behalf of the business must weigh the scales carefully.
The Fallacy of Missing Out on Digital Transformation
As a necessity of the age, businesses gain competitive advantage when they understand digital transformation correctly and adapt it to their businesses in accordance with their business styles. With the integration of digital solutions specific to the needs of the business, they meet the privilege of working systematically, agile and almost error-free in digital transformation processes. Since digital transformation, which provides countless advantages to businesses, brings with it a change, it can sometimes turn into an unpopular topic due to the attitude of managers to protect the existing business model and resist change. While making this important strategic decision, some managers may reject such a change for reasons such as resistance to innovation or inability to comprehend digital transformation correctly. The costs of digital transformation may be cited as a justification. Decision makers who fail to realize that digital transformation is a rational business investment that can multiply the investment many times over in the long run may therefore fall into the fallacy of missing out. Therefore, it becomes inevitable to miss the opportunity to grow and gain competitive advantage in digital transformation.
In order to minimize the Miss Miss Fallacy, businesses that base their strategic management decisions on accurate information, research data and data-based decision-making processes can be protected from the negative effects of the Miss Miss Fallacy.
References:
Arkes, H. R., & Blumer, C., The Psychology of Sunk Costs, Organizational Behavior and Human Decision Processes, 35, 1985, ss. 124-140
LinkEser, Rüya ve Toigonbaeva Davletkan. “Psikoloji ve İktisadın Birleşimi Olarak, Davranışsal İktisat.” Eskişehir Osmangazi Üniversitesi İktisadi ve İdari Bilimler Dergisi, 6 (1), ss. 287‐321,
LinkKahneman, Daniel, & Amos Tversky. “Prospect Theory: An Analysis of Decision under Risk.” Econometrica, vol. 47, no. 2, 1979, ss. 263–91. JSTOR,