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.
TIME — why J.C. Penney's coupon experiment failed ↗Diagram — not yet drawn
The value function's kink at the reference point, annotated with the J.C. Penney move as a shift of the reference point itself rather than of the price.
In the wild
Unvetted · not part of the tier assessment
What has been written about this tool in the last twelve months. Machine-retrieved and unchecked — everything above this line was checked.
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