BPM & Daniel Kahneman’s Research on Prospect Theory

I’m sure some of you are familiar with Prospect Theory by the Nobel Prize winner Daniel Kahneman and the profound implications of his work on economics. Prospect Theory is a behavioural economic theory that describes the way people choose between probabilistic alternatives that involve risk. Kahneman proved that people are mostly risk averse and yet in some scenarios they become risk seekers.


For example, he showed that for most people, if given the opportunity to choose between the options:

(a) win $9,000

(b) get a 95% chance to win $10,000 (and 5% chance to win nothing)

most people will prefer the sure thing and choose option (a), hence being risk averse.

On the other hand, the same people faced with the options:

(a) lose $9,000

(b) get a 95% chance to lose $10,000 (and 5% chance to lose nothing)

will suddenly become risk seekers and will choose option (b).

In both these examples, the more rational behaviour if calculated mathematically is to choose (b) in the first scenario and (a) in the second one! And yet usually people don’t follow these rational calculations.

Kahneman also proved that people’s decisions change according to their reference point. People don’t want to change, but once they make a change they don’t want to go back (to revert to their original position).

For example, every person has his own curve of Salary/Holiday days. You may settle for less holiday days for a better salary, and you may be willing to give up a potential raise if instead you get many more holiday days to enjoy with your family. Let’s assume you can choose between two options that are equally good for your personal preferences:

  1. Get a raise of $X
  2. Get an extra Y holiday days per year

Assuming that both options are equally good for you, you flip a coin and choose one. Let’s say based on this random decision you decided to choose a raise. A year passes and now you get an option to change your mind. Would you do it? Are you willing now to decrease your salary in return for more holiday days? That’s hard, as you and your family have adjusted to a higher income. And what if you had chosen a year ago to get the extra holiday days, would you be willing to change it now? You and your family are now used to a long holiday together, are you willing to give it up for more money?

What happened is that once the reference point has changed, most people would not want to go back and will choose the status quo. People don’t like to change, but once making a change they equally don’t like to change back…

Furthermore, as Kahneman describes, when evaluating a potential change, the majority of people will give more weight to the disadvantages of this change. To support a change, people need to be provided with many advantages and need to be moved to a new reference point.


Implications for Big Change and BPM

I found Kahneman’s work very intriguing in relation to my field of expertise, BPM. Why? I realized that his findings about human nature and behaviour clashed directly with what I knew to be the key to an organization’s success: The ability to change. Charles Darwin’s famous theory about the survival of the fittest, or more precisely, those that are most adaptable to change, supports the need to change, both for individuals and (in my humble opinion) organizations.

Big Change, according to Gartner, is what an organization needs to achieve in today’s rapidly changing world, in order to survive and stay competitive. Gartner, in April 2014, said: “Big Change involves significantly altering ongoing operations in a high risk environment characterized by elevated volatility, ambiguity, disparity/diversity and novelty/scope… At Gartner we call this “BPM Shift” and it is part of our emerging Business Transformation agenda.”

But if people are resistant to change, how can they achieve Big Change?


N.B.: This post was originally authored by Gal Horvitz, PNMsoft CEO, and first appeared on PNMsoft.com

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By Eli Stutz @ PNMsoft | March 4, 2015

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