Forbes India 15th Anniversary Special

Simply Speaking: Buy or bye bye?

The tug of war between perceived risk and perceived value

Published: Mar 21, 2023 01:25:04 PM IST
Updated: Mar 21, 2023 03:48:13 PM IST

Simply Speaking: Buy or bye bye?Humans have high risk consciousness but low risk assessment capability. The human mind does not appreciate probability instinctually. Therefore, risk is beaten by belief. Shared stories create belief. Image: Shutterstock

The universe is made of stories, not of atoms."  -Muriel Rukeyser

In the book Sapiens, Yuval Harari makes one of his key points – “There are no gods in the universe, no nations, no money, no human rights, no laws, and no justice outside the common imagination of human beings. Whether or not something is true doesn’t impact whether you believe it.”

We know that belief systems are created through common acknowledgment and common imagination. Money is money because we all accept it as such. Dan Loeb, in his Q1 2022 letter, said "to be an investor is to live constantly at the intersection of story and uncertainty."

Amazon has been the largest value creation story of recent times. Research on the performance of successful VC-backed tech companies in the 1990s shows that they raised less than $50 million before showing a return to investors. By comparison, Amazon raised $2.1 billion in investors’ money before the company broke even.

This happened because Jeff Bezos made risk an essential part of the growth storytelling. Amazon was about lower cost, greater selection, and faster delivery. Per his narrative, these massive investments in consumer benefits that would stand the test of time. This, in fact, did turn out to be true.

Bezos qualifies risk into two types:

  1. Risk you can’t walk back from. The risk is existential, make or break, defining the future of the company
  2. Risk you can walk away from. Fail early and get out.
Jeff Bezos wrote in Amazon’s first annual letter, in 1997, “Given a 10 percent chance of a hundred times payout, you should take that bet every time.” He also wrote “Failure and invention are inseparable twins. To invent you have to experiment, and if you know in advance that it’s going to work, it’s not an experiment.”

Humans have high risk consciousness but low risk assessment capability. The human mind does not appreciate probability instinctually. Therefore, risk is beaten by belief. Shared stories create belief.

On a broad basis, we can define 3 categories for risk –

  1. Where risk is primary factor - nuclear energy, mining, metallurgy, intensive industrial processes, dealing with emergencies.
  2. Where risk is intentional but secondary - gambling, speculative financial products or thrill seeking adventure.
  3. Where risk is neither primary not intentional but exceptional aberrations are the proof points by which risk concern might arise - personal products and food and consequential, dietary, hygiene or handling issues.
Also read: Routine without risk will stagnate: Viswanathan Anand

Pioneering work was done by Raymond Augustine Bauer. His initial proposition was that "Consumer behaviour involves risk in the sense that any action of a consumer will produce consequences which he cannot anticipate with anything approximating certainty, and some of which at least are likely to be unpleasant”.

He introduced the concept of perceived risk to the marketing literature and gave two possible definitions of risks where marketing management is concerned. First is adverse outcome and second its likely probability of occurrence.

Bauer defined five main types of perceived risks. These are time, social, physical, financial, and functional.

Donald F. Cox Risk Taking and Information Handling in Consume Behavior in 1967 extended work in this area. Later Kahneman and Tversky’s loss aversion was propounded in 1974,  Thaler’s mental accounting in 1985. These brought together economics, psychology, anthropology, sociology and ergonomics – to get a better understanding of relationships between risk and marketing.

Risk psychology complements marketing in defining risk attitudes and shaping risk perception via communication. Perceived risk attitudes are a useful complement of the positioning statement. Brand communication ought to be framed accounting for psychological biases in a context of decision under uncertainty.

Decision theory has inspired marketing. In this setting, risk is seen as an objective characteristic of a given situation, although assessing this risk may vary by individual.

Kahneman and Tversky’s prospect theory is also well known in consumer research and has inspired some works by economists and psychologists at the interface with marketing such as loss aversion and status quo biases. Thaler has exported insights from risk economics and psychology toward Marketing, especially with the concept of mental accounting.

Psychologists have suggested that there was an ecological ground in the way people interpreted their environment: Simon’s bounded rationality, Gigerenzer’s frugal heuristics and adaptive toolbox paved the way for a convergence of – bounded rationality, the feeling of risks and the role of the emotions- leading to the rise of a new approach of decision-making under uncertainty.

Also read: Why the customer isn't always right

More recently neuroeconomics has proposed concepts that could be more systematically exploited to the benefit of Marketing and could certainly enlighten the way people perceive and act according to their risk profile and to product’s potential threats. The key import to marketing is the understanding of risk as a feeling.

Behavioural economics and nudges – try to identify and to exploit the mental biases influencing our decision-making process. Nudge marketers investigate how those gentle messages addressed to free individuals could be applied to consumers of goods and services The relatively new discipline of Neuroeconomics can help in designing those communications by focusing on how behaviour may be impacted by descriptions and pictures.

Yet behavioural approaches fail to provide ultimate explanations of Homo economicus choices. It can explain what the bias is. It can explain how the bias operates. But it is unable to explain the ’reason why’ of the observed biases.

Risk perception can depart from objective hazard evaluation because of evolutionary fears such as heights, confinement, predation and poisoning.

What I see changes what I know. What I know changes what I see. Relationships between product involvement and risk perception are supposed to be two ways. Mainly, when products are perceived to be risky, consumers show higher levels of involvement.

However, it can also be assumed that, in various circumstances, involvement might affect risk perception. For instance, a closer and deeper search at product information could change risk perception; deeper concern for purchases could provoke a higher sensitivity and less tolerance to perceived risks.

Also read: Do what you are afraid to do: Spotify's Neha Ahuja

Factor mapping – a graphical representation of products, brands, individuals’ coordinates or ‘positions’ according to descriptive and predictive dimensions. Most often two dimensions are used to describe attitudes and behaviour. Distances between positionings truly correspond to differences in attitudes. Recent approaches of marketing strategical maps take into account both consumer’s heterogeneity by way of segmentation and competitive positioning of brands. As such, positioning becomes segment specific.

Product positioning is a crucial component of competitive marketing strategy. Typically, the position of a product, product line, brand or company is displayed relative to their competitors. For instance, firms wishing to sell brands within a specific product category may consider the image of that category and the firm’s own image. Usually, quantitative perceptual maps are produced when respondents rate the similarity between several dimensions within that category using a paired comparison procedure. Implications are for a firm to select a specific dimension for their brand. Perceptual maps usually reveal that most markets are not homogeneous, and that they can be segmented into smaller homogeneous groups.

Experiments in behavioural economics have proven consumers are sensitive to framing. Although they should react the same way no matter how the message is formulated, it happens that people tend to make distinct judgments when exposed to alternate but equivalent ways of describing a promise. Can you imagine Marketing, romance, star power, financial bets or indeed politics without this reality?

Shubhranshu Singh is vice president, marketing - domestic & IB, CVBU, Tata Motors. He writes Simply Speaking, a weekly column on Storyboard18. Views expressed are personal.