Weaknesses of Prospect Theory in Consumer Decision-Making

Prospect theory, developed by Daniel Kahneman and Amos Tversky (1979), has been influential in explaining how individuals make decisions under conditions of risk and uncertainty. However, despite its contributions, the theory has faced criticism and possesses inherent weaknesses that limit its applicability to real-world consumer decision-making.

Complexity

One significant limitation of prospect theory is its complexity. Compared to other decision-making models, such as the expected utility theory, prospect theory introduces numerous variables and concepts, making it difficult to apply practically. The theory's reliance on subjective value functions, probability weighting, and reference points adds layers of complexity that may not be easily understood or utilized by consumers in their everyday decision-making. This complexity may lead individuals to only utilize certain aspects of the theory while neglecting others, thereby reducing its predictive power.

Limited Applicability

Furthermore, prospect theory may only be relevant to certain types of purchases made by some individuals and not all consumer decision-making processes. This limitation reduces its overall validity and usefulness. For instance, the theory's emphasis on risk aversion and the framing of gains and losses may be more applicable to decisions involving financial investments or gambles, where the potential outcomes are clearly defined. However, it may not be as relevant for decisions involving experiential purchases, such as vacations or entertainment, where the value is subjective and difficult to quantify. Similarly, prospect theory may apply to quick and low-cost purchases, such as household items like a kettle, but may not be relevant for decisions involving expensive items like cars or mobile phones, where consumers engage in more extensive information search and evaluation.

Lack of Empirical Evidence

Another weakness of prospect theory is the lack of consistent empirical evidence to support all its claims. As a theory, it lacks specific research evidence to support its claims fully. While some studies have provided evidence for certain aspects of the theory, such as loss aversion and the endowment effect, others have produced mixed or contradictory results. Conducting research on decision-making processes is inherently challenging, as it often relies on self-reporting, which may not always accurately reflect individuals' actual decision-making mechanisms. People may not be consciously aware of the factors influencing their choices or may provide socially desirable responses, leading to inconsistencies in decision-making over time.

Overemphasis on Rationality

Finally, prospect theory has been criticized for its overemphasis on rationality in decision-making. The theory assumes that individuals make decisions based primarily on cognitive and rational processes, carefully weighing potential outcomes and probabilities. However, this assumption neglects the significant role of emotions and intuition in shaping consumer choices. People's choices can be heavily influenced by gut feelings, emotional attachments to products or brands, and social influences, leading to deviations from the predictions of prospect theory. For instance, a consumer might choose to purchase a particular brand of clothing because it evokes positive memories or aligns with their self-image, even if a competing brand offers a better price-quality ratio. In such cases, emotional factors override rational considerations, highlighting the limitations of prospect theory in explaining all aspects of consumer decision-making.

Conclusion

In conclusion, while prospect theory offers valuable insights into decision-making under uncertainty, its weaknesses, including complexity, limited applicability, lack of consistent empirical support, and the overemphasis on rationality, restrict its ability to fully explain the complexities of consumer choices. Future research should aim to address these limitations and develop more comprehensive models that incorporate emotional, social, and contextual factors influencing consumer behaviour.

References

Kahneman, D., & Tversky, A. (1979). Prospect Theory: An Analysis of Decision Under Risk. Econometrica, 47(2), 263-292.