Prospect Theory

QUOTE

Daniel Kahneman once said…

“The fear of losing is much stronger than the joy of gaining.”

(Israeli-American author and psychologist.)

CONCEPT

Prospect Theory

Prospect Theory suggests that people value gains and losses differently: losses are felt more intensely than gains of the same magnitude.

This theory implies that people are more likely to make decisions based on the potential for loss rather than the potential for gain.

And when they decide if something is a win or a loss, they compare it to what they expected or what they're used to. This helps explain why sometimes people make choices that might seem odd, because they're more focused on avoiding losses than on getting gains.

STORY

Don’t Mention … the Pension?

In the late 1990s, France stood on the precipice of a demographic and financial crisis that threatened to engulf its cherished pension system.

With an aging population and dwindling contributions, the French government, led by Prime Minister Lionel Jospin, proposed sweeping reforms aimed at safeguarding the future of public pensions.

The plan was bold: it required French workers to contribute to the pension system for a longer period before they could claim full benefits. Specifically, the proposal extended the contribution period from 37.5 to 40 years for eligibility for full benefits, a move that was estimated to affect millions of workers across the country.

The reaction from the French public was swift and fierce.

The streets of Paris and other cities across France erupted in a series of protests and strikes that were unprecedented in their scale and intensity. Over 800,000 people took to the streets in a display of collective outrage and defiance.

The nation, renowned for its social solidarity and strong welfare state, was being asked to recalibrate its expectations for retirement, and the citizens were not ready to accept what they perceived as a profound loss.

French workers focused more on the immediate increase in the number of working years required for a full pension (a moderate loss) rather than the long-term sustainability of the pension system itself (a massive gain). The psychological impact of this perceived loss was so powerful that it mobilized hundreds of thousands of people to take action.

Despite the government's insistence that the reforms were essential to prevent the pension system from collapsing under the weight of an aging population, the French public's loss aversion was palpable.

In the face of such widespread unrest, the government was forced to negotiate with unions and make significant concessions, ultimately watering down the original proposal and putting strain on their economic system that still reverberates nearly three decades later.