Customers Seek to Avoid Regret
Most of us have never heard of Amos Tversky and Daniel Kahneman; if we have, we probably learned of them through Michael Lewis’s fascinating book The Undoing Project . Lewis is famous for taking wonky, esoteric topics and making them accessible to broader audiences. He is well-known for his best-selling books Moneyball, The Big Short, and Liar’s Poker.
The Undoing Project is an interesting story of the complex relationship between Tversky and Kahneman, and a look at how their important research shaped our understanding of how humans make decisions. Tversky and Kahneman first met as young PhD psychologists in the 1960s at Hebrew University in Jerusalem. Their work together over the coming three decades led to many breakthrough discoveries in the workings of the human mind, particularly as it relates to understanding the biases we hold when faced with decisions. Tversky ultimately ended up at Stanford and Kahneman at Princeton.
Kahneman was awarded a Nobel Prize in Economics in 2002, and Tversky surely would have as well had he not died of cancer in 1996 — Nobel prizes are not awarded posthumously. One of the hallmarks of their research called into question the idea that humans are rational decision makers, as the field of economics had claimed for over 200 years. Their research proved that as humans we are often misguided by biases that cause us to make decisions that are not altogether rational, at least not in the way economists once thought.
As humans, we are much more complicated than traditional economic theory would have us believe.
Tversky and Kahneman contributed heavily to the creation of a new field called behavioral economics, which studies the effects of psychological, emotional, and cultural factors on the decisions of individuals and institutions, and how those decisions vary from those implied by classical economic theory.
One of the early topics that fascinated Tversky and Kahneman was the concept of regret as it related to its influence on decision-making. In a memo to Tversky in the 1970s, Kahneman wrote: It is the anticipation of regret that affects decisions, along with the anticipation of other consequences. When people make decisions, they do not seek to maximize utility. They seek to minimize regret.
Each of us has felt regret many times before, ranging from regret about little decisions (I wish I had purchased the other pair of shoes) to bigger decisions like choosing a college major. When making buying decisions about products, say a house or car, it’s easier for humans to minimize the likelihood of future regret because our satisfaction is easier to gauge.
Conversely, it’s harder for us to assess the likelihood of future regret when deciding on an expert to assist us in solving an important problem.
As regret-avoiding creatures, humans seek out information to help minimize this uncomfortable feeling.
Because human decision-making is influenced by regret avoidance, any steps we can take as professionals to reduce this anticipated feeling will increase our chances of success. In much the same way that channel markers guide a ship’s captain safely to harbor, this rainmaker skill leads clients to a good decision while minimizing anticipated regret.