Definition
Prospect theory highlights how people weigh risk versus reward in decision-making. For example, if someone offers you $100 with no strings attached or the opportunity to flip a coin for a 50% chance at $200, you’d most likely choose the guaranteed $100. Conversely, if you owe someone $100, but they give you a chance to flip a coin—heads you pay them $200, tails you pay nothing—you’d probably choose the latter. That’s because fear of substantial loss is often more powerful than potential for substantial gain.
HR application
Prospect theory often comes into play during Open Enrollment. A 2018 study found that employees who were happy with their benefits were more likely to view any changes as negative. Those who were unhappy with their benefits saw potential changes as positive.
The way you present changes to employees may be just as important as the changes themselves. A few communication tips:
- Acknowledge that employees will likely view any change through a lens of what they are losing, especially if they like what they already have.
- Emphasize what is not changing and focus on what employees get to keep.
- Focus on what employees gain through any changes to benefits.
- Offer choices rather than mandates. Empowering employees to choose from a few new benefits, for example, can take the sting out of perceived loss.