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Irrational Loss Aversion

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Brian Bozzuto's irrational loss aversion slides from Agile 2009."Consumers will cut purchases of a specific food stuff (eggs, orange juice) 2.5 times more than they will increase in response to a price cut" < Irrational

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Irrational Loss Aversion

2. 2. But First, an Auction! Irrational Loss Aversion Click to edit Master text styles ____ __ ____ _____ ____ ______ Second _____ _____ level Third level ____ _____ Fourth level _____ _____ Fifth level ____ _____ © 2009 BigVisible Solutions, Inc.. All Rights Reserved 2
3. 3. A Couple Rules Irrational Loss Aversion Click to edit Master text styles starts at \$1 ____ __ ____ _____ ____ ______ 1. Bidding for the \$20 bill Second _____ _____ level 2. All bids must be in increments of \$1 Third level ____ _____ Fourth level _____ _____ 3. The two top bidders both must pay, but only the top Fifth level ____ _____ bidder gets the \$20 bill © 2009 BigVisible Solutions, Inc.. All Rights Reserved 3
4. 4. Where the Money is Going… Irrational Loss Aversion Click to edit Master text styles ____ __ ____ _____ ____ ______ Second _____ _____ level Third level ____ _____ Fourth level _____ _____ Fifth level ____ _____ © 2009 BigVisible Solutions, Inc.. All Rights Reserved 4
5. 5. Irrational Loss Aversion Irrational Loss Aversion Click to editmuch did ____\$20 bill go for? ► So how Master textthe ______ ____ __ ____ _____ styles Second _____ _____ level Third level ____ _____ Fourth level _____ _____ Experience with the game has shown that Fifth level ____ _____ it is possible to 'sell' a dollar bill for considerably more. A total of payments between three and five times the value of is not uncommon. (Shubik, 1971) © 2009 BigVisible Solutions, Inc.. All Rights Reserved 5
6. 6. This Isn’t a Unique Instance Irrational Loss Aversion Click to edit Master text styles ► Consumer Behaviors____ ______ ____ __ ____ _____ Second _____ will cut purchases of a specific food stuff (eggs, orange juice) 2.5 times _____ level Consumers Third levelthan they will increase in response to a price cut ____ more _____ Fourth level _____ _____ Fifth level ____ _____ ► Packaging of Products “Unlimited” Plans All Inclusive Resort Package Insurance on a Rental Car ► Individual Behaviors People will assume more risk to avoid realizing a loss Doubling down on a loss when gambling © 2009 BigVisible Solutions, Inc.. All Rights Reserved Brafman, Brafman, 2008 6
7. 7. So What is at Play Here? The Agile Analyst Click to edit Master text styles ____ __ ____ _____ ____ ______ ► Loss Aversion Value Second _____value gains in a _____ level People Third level ____ consistent, rational way _____ Fourth level _____ _____ Individuals value avoiding Fifth level ____ _____ a loss twice as much as an equally sized gain Loss Gain Prospect Theory of Valuation "Kahneman & Tversky’s (1979) “Prospect Theory: An analysis of decision under risk” © 2009 BigVisible Solutions, Inc.. All Rights Reserved 7
8. 8. People Bear More Risk to Avoid a Loss The Agile Analyst ►____to edit Stock, trading at ______ Click __ ____ _____ ____ \$90 Consider a Master text styles Second _____Bought the stock at \$80 _____ level Person #1: Third level#2: Bought the stock at \$100 Person ____ _____ Fourth level _____ _____ ►____level is 50% more likely to Fifth _____ Person #2 hold the stock and not sell it ► Individuals Make Less Optimal In our attempts to avoid Decisions Stocks that individuals sell in this realizing a loss, we make situation performed 3.4% better than the situation worse the investments they held © 2009 BigVisible Solutions, Inc.. All Rights Reserved Odean, 1998 8
9. 9. How Does This Apply IT Projects? Irrational Loss Aversion Click to edit Master textan ______ ► Projects are Basically____ ____ __ ____ _____ styles Second _____ _____ level Investment Third level ____ _____ ► Some Figures to Consider Fourth level “Troubled Projects”, 2006) _____ _____ (PM Solutions, Fifth level of Projects were “Troubled” ____ 47% _____ 30% of Troubled Projects Continued with No Justification Major impediment was stakeholders not acknowledging there was a problem © 2009 BigVisible Solutions, Inc.. All Rights Reserved 9
10. 10. What’s Happens to a Project if We Can’t Kill It? Irrational Loss Aversion Click to edit Master text styles ____ __ ____ _____ ____ ______ Second _____ _____ level Third level ____ _____ Fourth level _____ _____ Fifth level ____ _____ © 2009 BigVisible Solutions, Inc.. All Rights Reserved 10
11. 11. What is at Stake for the Team? The Agile Analyst Click to edit Master text styles ____ __ ____ _____ ____ ______ Business Case of the Project ► Second _____ _____ level ► Cost Incurred to Date Third level ____ _____ Fourth level _____ _____ ► Reputation of the Team Fifth level ____ _____ Members ► Employment of the Team Members ► Ego of the Team Members © 2009 BigVisible Solutions, Inc.. All Rights Reserved 11
12. 12. What are the Sources of Pressure? The Agile Analyst Click to editCulture that Rewards Heroics ► Corporate Master text styles ____ __ ____ _____ ____ ______ Second _____ it right” ► Desirelevel _____ to “Do Third level ____ _____ ► Unrealistic Expectations of Stakeholders Fourth level _____ _____ ► Single Release After a Long Build Cycle Fifth level ____ _____ Agile Helps Alleviate These Pressures, but Doesn’t Guarantee Anything © 2009 BigVisible Solutions, Inc.. All Rights Reserved 12
13. 13. My Experience Irrational Loss Aversion Click to edit Masterwas____ ______ generation portal to help ► Alpha Company textbuilding a next ____ __ ____ _____ styles Second _____ _____ levelmake financial decisions investors Third level Flex, AJAX and other Web 2.0 technologies ____ Leveraged _____ Fourth level contextual information and mash ups relating information to their own Provided _____ _____ Fifth level or watch lists ____ positions _____ Depended on numerous web services from upstream systems ► Ultimately this platform was not scalable for the number of users or level of performance the business wanted © 2009 BigVisible Solutions, Inc.. All Rights Reserved 13