Loss aversion

• His scientific contributions, many made in collaboration with cognitive psychologist Amos Tversky, transformed the disciplines of psychology and economics.
• I moved to Vancouver, Canada to study in his lab at University of British Columbia, which he shared with psychologist Ann Triesman.
• Although Danny was not yet as famous as he was to become, his genius was widely recognised.
• But Danny and Tversky showed that incorporating important psychological principles into economics could explain many puzzling observations about human nature.

Nudge psychology

• Teachers (like myself) still use these demonstrations in the classroom, so reliable are the results they reported.
• A simple example: given a choice between £100 for sure and a 50/50 chance of gaining £200, most people will take the £100.
• But given a choice between losing £100 for sure and a 50/50 chance of losing £200, people will take the 50/50 chance.
• Nudge theory is the notion that our behaviour can be successfully influenced through “soft” interventions.

The science of wellbeing

• Danny also pioneered the analysis of wellbeing.
• Our reflections about an experience are more likely to be influenced by our interpretation of them than the positive or negative feelings we have during an experience.
• That is why his research, even published many decades ago, continues to act as the basis for new ideas and debates.
• At one point during the evening Danny said that people were coming to see him to say goodbye.

Daniel Read does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

• Then it turns out there is a service fee.
• By the time you pay the final price, it is no longer the fantastic offer you thought.
• Drip pricing – a type of “junk fee” – is notorious in event and travel ticketing, and is creeping into other areas, such as movie tickets.

Present bias preference: why starting over feels too costly

• Resistance to the idea of starting the search all over again is not simply a matter of laziness or indecision.
• Drip pricing exploits this cognitive bias by getting you to make a decision and commit to the transaction process.
• When you’re far into a complicated booking process and extra prices get added, starting all over again feels like a burden.
• Read more:
  Why telling people they could get sick in the future won't persuade them to be healthy now

Loss aversion: buying more expensive tickets

• Drip pricing doesn’t just capitalise on our desire for immediate rewards; it also plays on our innate fear of losing out.
• This second psychological phenomenon that drip pricing exploits is known as loss aversion – that we feel more pain from losing something than pleasure from gaining the same thing.
• The concept of loss aversion was first outlined by economists Daniel Kahneman and Amos Tversky in a 1979 paper that is the third most-cited article in economics.
• Read more:
  Explainer: what is loss aversion and is it real?

Do consumers need protection?

• Empirical evidence supports the above theoretical predictions about the impact of drop pricing on consumers.
• A 2020 study quantified how much consumers dislike the lack of transparency in drip pricing (based on tracking the reactions of 225 undergraduates using fictional airline and hotel-booking websites).
• The authors liken the practice to the “taximeter effect” – the discomfort consumers feel watching costs accumulate.
• Many countries are taking steps to protect consumers from drip pricing.

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• Using a proprietary algorithm, all behavioral factors are rolled up into a Behavioral Risk Index, a single number from 1-10 that indicates the behavioral risk of investors.
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