The peak–end rule was first established by Daniel Kahneman and others in 1993. In the experiment, participants were divided into two groups. They had to undergo an unpleasant experience. Everything else was the same, except for one group who had to go through an extra, less unpleasant experience at the end. Let us call this group Group B and previous group Group A.
The researchers concluded that the most unpleasant, the peak, and the final intensity of unpleasantness, the end were used to evaluate the procedure. In this case, the end of Group B is less unpleasant. At the same time, the peak of both Group A and Group B were the same. Thus, the sum of the unpleasantness of the peak and the end was less for Group B. As a result, participants from Group B found the experience less unpleasant, although for both the duration of and the sum of unpleasantness, Group A < Group B.
The peak-end rule is a type of . The peak and the end simplify and represent the whole experience. It reduces people's and helps people make quick decisions.From an evolutionary point of view, emotion related memories help us survive, keep us safe. For example, fear related memories help us recognize and better deal with dangerous situations.
When memory sticks, it lasts longer and can be recalled easier. Memories associated with strong emotions stick. Experiments were done to prove strong emotion-related things are recalled more often. An experiment done by found a biological explanation for this.
Why our memory prefers what happened at the end can be explained by the recency effect. suggests that we consider recent events to be more important. What happens at the end of an experience is more recent to us. Thus, we consider the things that happen at the end of an experience to be more important. The end is more memorable than other parts.
Adding a positive peak can establish a good memory of an experience even though there may be unimportant unpleasant moments in between. This technique has been applied to many fields, for example, the business field. When customers are leaving, salesmen help the customer hold the door. This act leaves a good final and overall impression. Another example is in the educational field. To make receiving negative feedback more acceptable, ending with the most pleasant part of the feedback will help.
People's memories of an experience influence their decision making. Adding a good end encourages people to experience the event a second time. Some medical procedures are too painful for the patients to repeat. Adding something positive at the end creates a more positive impression of the experience. After doing so, there is a smaller probability the patient is unwilling to receive the treatment a second time. Then, patients can more effectively recover with a less total cost and shorter time.
Inversely, a negative end ruins the memory of an experience even though everything before was perfect.If a person wants themselves or other people to do something less, adding a negative end to the experience helps.
People's memories of their experiences are not what they experienced. So, relying on our memories to make decisions does not lead to the highest net pleasure. To experience the net largest amount of pleasure, people should spend as much time as possible on things that they are unwilling to stop doing.
Studies found that other factors influence the peak-end rule. Firstly, the expectation. A high expectation is compared with the actual experience at the start. If a difference exists, the starting experience will be the most important factor in overall experience evaluation. The peak-end rule is more likely to be applicable to lower expectation situations. Secondly, one study finds that the effect of peak-end law is small on one day experiences. Moreover, some people are easily affected by the rule but others are not. Thirdly, according to and Carmon, how we feel at the moment of evaluation also affects the outcome.
Loss aversion
Loss aversion is a concept in psychology. It is to prefer avoiding losses to acquiring equivalent gains. The principle is prominent in economics.
The principle of loss aversion was first proposed by Daniel Kahneman and Amos Tversky in 1979. Loss aversion happens when people face the same amount of gains and losses and find the loss is more unbearable. In other words, the pain of loss is greater than the pleasure of equal gain. In some experiments, it shows females have a higher level of loss aversion than males.
The cause of loss aversion lies in people's asymmetric emotional response to gain and loss. Studies show that this asymmetry is particularly strong during the anticipation processing and the immediate experience after presenting the outcome. One study of income and well-being indicates that when people make loss-averse choices, it is not directly due to the loss itself but because the impact brings a series of negative consequences that follow the loss.A classic example presented in the book "Thinking, Fast and Slow" of a flipping coin implies that people will first compare the satisfaction of gaining with the pain of losing before making a decision. Thus, most people would not choose to participate in coin gambling with 50% to get $150 and 50% to lose $100; and according to the "loss aversion ratio," the minimum amount to fulfil the pain of losing $100 will be $200 (assume the coefficient is 2).
In 2001, J. O' Doherty and his colleagues had found that humans process losses and gains in qualitatively different ways by using brain imaging technology and suggests the correlation between the magnitude of brain activation and the extent of reward and losses received.When we are evaluating potential gains, the areas of the brain that process value and reward become more active than it does when assessing the potential losses. The different loss aversion levels differ from individuals by the degrees of sensitivity to losses and gains, in which people are more loss-averse with stronger sensitivity.
Equity premium puzzle(EPP) refers to the problem of why there is a big difference between returns in stocks and risk-free investments historically. Since stocks are much riskier than government bonds, the underinvestment in stocks relative to bonds supports the idea of loss aversion theory. Specifically, it's the myopic loss aversion introduced by Shlomo Benartzi and Richard Thaler, which indicates the behavioural characteristics of "loss aversion" and "frequent evaluations" of investors. Benartzi and Thaler argue that loss-averse investors are more willing to take risks if they do not evaluate the performance of their investments frequently. In their model, investors are unwilling to accept return variability and tend to take a short-term view of their wealth.
Demand is more elastic for price increases than price decreases, based on the assumption that the price increase is a loss while the price decrease is a gain for consumers.
Based on the principle of loss aversion, Daniel Kahneman and Amos Twersky developed prospect theory to explain how consumers make decisions in uncertain situations. Unlike the hypothesis of rational man use in economics, prospect theory reveals the irrational psychological factors that affect the choice behaviour. Most people are unwilling to take risks when facing gains but become risk-seeking in losses.
Loss aversion theory explains the endowment effect. The endowment effect refers to the finding that once an individual owns a good, he/she tends to naturally place more value than he did before he didn't own it. Due to the asymmetric responses to losses and gains in the decision-making process, the consideration of "loss avoidance" is far greater than that of "gain seeking," so people value more on a good they own.
By using the loss aversion theory as a marketing strategy, firms are able to gain higher profits by changing consumers' behaviours. For example:
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