6.6
Prospect Theory / Reference Price
An account of choice in which outcomes are judged as gains or losses against a reference point, with losses weighted more heavily than equivalent gains.
Kahneman & Tversky (1979); brought into pricing by Thaler (1985)
What it does
Losses outweigh equivalent gains, and price is read against a reference point rather than absolutely. Explains anchoring, framing, and why the presentation of a discount changes its effect.
When it breaks
Laboratory effect sizes shrink markedly in the field, and popular derivatives like the decoy effect replicate poorly. Trust the core asymmetry, not the ornaments.
Case
J.C. Penney's 2012 “Fair and Square” switch to everyday low pricing removed coupons and inflated list prices, destroying the reference-price gains customers had been buying. Q1 2012 comparable store sales fell 18.9%, the company posted a $163m net loss, and the CEO was removed in 2013.
HBS Working Knowledge · What went wrong at J.C. Penney? ↗In the wild
Unchecked · not part of the tier
What people have written about this tool in the last twelve months. A machine found these and nobody has read them. Everything above this line was checked by hand.
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