Hedonic framing refers to how people try to maximise psychological pleasure and minimise pain (regret) when faced with decisions relating to gains and losses. This means that two individual gains are perceived to be more valuable than a single larger gain of the same value.
Similarly, two separate losses will be perceived to be less painful if combined into a single, larger loss. The chart below illustrates how people perceive the psychological value of gains and losses due to hedonic framing.
To maximise utility the psychologist and behavioural economist Richard Thaler identified four strategies of hedonic framing which best deal with joint outcomes.
- Segregate gains: (because the gain function is concave).
- Add together losses: (because the loss function is convex).
- Include smaller losses with larger gains: (to offset loss aversion).
- Separate small gains from larger losses: (because the gain curve is steepest at the origin, the utility of a small gain can exceed the utility of slightly reducing a large loss). Sometimes called the “silver lining effect” this reflects the classic “cash-back” promotion used by many companies, including car dealers and gambling companies. Paddypower below offers a lossback which is a free bet based upon how much a player has lost.
For conversion this suggests that it is better to phrase a saving or discount as a potential loss to the customer as this will perceived to be of greater value than expressing it as a gain.
When promoting a large gain, such as a deposit bonus, it is better to break it up and promote a number of smaller bonuses that in total equal the larger bonus as they will be perceived to be of greater value than the single bonus.
When a customer makes a loss or they incur a charge it is preferable to show it as a single loss or payment rather than break it up into smaller payments. For example a £3,000 hot tub seems a lot less expensive when combined with the cost of a £400,000 house. Car manufacturers also use this approach by trying to sell extras on top of the showroom price.
Other related terms include:
Prospect theory – where the probability of a loss is known
loss aversion – why people are loss averse
Mental accounting – how people manage their different pots of money
Hedonic treadmill – how people respond to purchases and life events
Conversion marketing – Glossary of Conversion Marketing.
Over 300 tools reviewed – Digital Marketing Toolbox.
Loss aversion – The psychology of loss.
A/B testing software – Which A/B testing tools should you choose?