You are at home and all of the free (but dubious) websites for movie downloads don’t work. You decide you want to be classy and pay to watch high quality Netflix movie.

If you go to Netflix’s online subscription platform, you are quickly invited to “Choose the plan you like best. The first month is free”.

But which subscription should you go for?

With this question, the budding psychologist in you has just tapped into prospect theory (PT), one of the most discussed psychological theories of this century.

Prospect theory and loss aversion

PT is a theory of decision making, stating that people estimate the perceived likelihood of available options by overweighting small subjective probabilities and underweighting large subjective probabilities.

In PT, loss aversion (LA) refers to the tendency to prefer avoiding losses than obtaining equivalent gains. LA operates as a function of a dual processing system where effortless thought is the norm and where thought monitoring is lax, allowing the expression of intuitive judgments, including erroneous ones.

Netflix Marketing and Loss Aversion

When choosing your Netflix subscription, LA first influences your decision making through the framing effect: when irrelevant features unjustifiably influence decision-making. By placing “premium” as the default subscription option, and comparing this plan with two other less inclusive alternatives, Netflix gives the you a negative choice frame, as though by not choosing “premium” you miss out.

Secondly, this loss frame can also invoke fear of omission (not buying the ‘right’ (optimal) subscription) and commission errors (buying the ‘wrong’ (suboptimal) subscription), which induce regret in hindsight.

Indeed, people feel mistakes of commission more poignantly than those of omission (omission bias). It follows, that when you, the customer, use subscription plan features as the key attribute for choosing a Netflix plan, you are more likely to concern yourself with not making the ‘wrong’ (less inclusive but also less expensive) rather than the ‘right’ (more inclusive but also more expensive) choice. This is because, according to Hsee’s evaluability hypothesis, framing effects work particularly well in joint evaluation.

In one classic experiment, researchers asked participants to read the descriptions of two dictionaries. Dictionary B had 10,000 more entries than Dictionary A, but its front cover was torn while Dictionary A was completely new. When the dictionaries were presented in a single evaluation, participants chose Dictionary A. In joint evaluation this preference was reversed. The number of entries bore little weight on single evaluation but in joint evaluation, it was evident that Dictionary B was superior on this attribute and the number of entries was more important than the cover’s condition.

The study exemplifies how joint evaluation increases discrepancies between which alternatives preclude the most loss. Preferences, subsequently, reverse in favor of the least loss aversive option (salient reference attribute).

Netflix Marketing, the Pain of Paying, and Zero Cost

The ‘pain of paying’ operates in a similar way. For example, paying with cash elicits greater loss than paying with credit card. Companies like Netflix, therefore, promote one free month’s subscription. This technique implicitly encourages you to overreact to the free month of subscription by unconsciously treating it as zero cost, which attenuates LA experienced after prepaying full subscription.

To illustrate zero cost, experimenters placed a booth in an MIT student center where a passer-by could buy Hershey’s kisses for one penny or Lindt truffles for fifteen cents. Most people chose the truffles over the kisses. In a second condition, in which Lindt truffles cost fourteen cents and Hershey’s kisses cost nothing, most people chose the kisses over the truffles.

If people operate on purely mathematical logic they should have behaved the same in both conditions because the price difference between the sweets was constant. Instead, people calculated the difference between cost and reward. When both items cost money, they focused primarily on the quality of the products but when one product was free they focused primarily on the cost of the products.

In this light, Netflix’s free month of services potentially dampens LA and, consequently, the tendency to weigh pros and cons with the equal focus deployed when factoring in potential losses.

Netflix Marketing and the Sunk Cost Fallacy

Even when people factor in losses they are, nevertheless, still exposed to errors. One such error is the sunk cost fallacy: when people persevere in a fruitless activity because of hitherto invested resources (time, money, or effort).

In another classic experiment, Tversky and Kahneman asked participants to imagine that they are going to see a play which costs $10 per ticket. As they enter the theater, they discover that their ticket is missing. When participants were asked whether they would still buy a ticket, 46% confirmed they would. In a similar experiment, other participants were told to imagine that they have decided to go see a play which costs $10 per ticket. As they enter the theater, participants discover that they have lost a $10 bill. In this scenario, however, 88% of participants confirmed they would still buy a ticket. Tversky and Kahneman explain this sunk cost fallacy by describing how LA mediates mental accounting.

According to mental accounting, if costs outweigh benefits, incurred extra costs (inconvenience, time, or money) are contained in different mental accounts. Going to the theatre is, thus, a transaction: the cost of a ticket is exchanged for the experience of the play such that buying a second ticket increases the cost in the ‘theatre’ account to an unacceptable level. Loss of cash, however, is not deducted from the ‘theatre’ account and only affects the purchase by making participants feel less wealthy.

Hence, when people attach labels to money (e.g., disposable cash can be “theatre money” but “theatre money” is not simply disposable cash) they make decisions by considering each mental account separately, missing the big picture of opportunity costs (trade-offs).

The Status Quo Bias

In addition, LA contributes to sunk cost fallacy by referencing the status quo bias (i.e., the preference for the current state of things). In one study, participants had to imagine they had inherited some investments and gave them alternative investments they could switch into. Compared to the control group, who were asked to imagine having the cash equivalent of the inherited investments, the experimental group was unlikely to shift from the original inherited investments.

The study results intimate that the status quo bias functions as a reference point, where aspects of alternative choices are evaluated as advantages or disadvantages relative to the current situation, such that disadvantages of alternatives are felt more strongly than corresponding advantages.

In this vein, the status quo bias predicts that you will not unsubscribe from Netflix after the free month, even if you do not use Netflix.

The prospect of loss (paying for Netflix but not using it) can motivate you to watch TV just to ‘get your money’s worth’. Unsubscribing would also produce negative changes to the status quo by eliminating choice: the fact that you could potentially watch Netflix even if you actually do not.

Time spent on Netflix because of the sunk cost fallacy, can, nevertheless, help you derive increasing post purchase satisfaction through increased personal connection with the product.

Also, when you watch Netflix, despite a lack of interest, you are more likely to justify your subscription. This is because the cognitive dissonance you experience between your attitude and behavior is likely to make you feel uncomfortable at the thought of having wasted time and money, so you aim to reduce it. Since justifying your behavior is easier than changing your attitude, you are more likely to continue paying for and watching Netflix than to change your attitude and face your mislead investment.

How Netflix Takes Your Money In Sum

So there it is, Netflix subscriptions demystified.

While not without its limitations, PT robustly shows how, that in the human search for coherence and security there seems to be the seed of compulsion, the sort of addiction to stability and continuity that transforms into LA when threatened.

The impact of LA on framing effects, through omission bias, joint (vs single) evaluation and zero cost offers, and the impact of LA on sunk-cost fallacy through status quo bias, cognitive dissonance and mental accounting, is evident.

Cumulatively, LA amply explains a wide range of decision making phenomena by invoking bounded rationality, which reflects an exclusively human proclivity to evaluate outcomes in terms of loss and gain, where loss is felt more powerfully than gain.

In this sense, when we confess that some efforts are in vain and some losses enduring, we admit that one of the only certainties in life is uncertainty. In the end, knowing about what errors we are susceptible to, does not make us more likely to commit them, but urges us to correct ourselves.

Should you subscribe to ‘premium’ Netflix?

You decide.

References

Hsee, C. K., & Leclerc, F. (1998). Will products look more attractive when evaluated jointly or when evaluated separately? Journal of Consumer Research, 25, 175-186. DOI:

Samuelson, W., & Zeckhauser, R. J. (1988). Status quo bias in decision making. Journal of Risk and Uncertainty, 1, 7-59. DOI: 10.1007/BF00055564

Shampanier, K., Mazar, N., & Ariely, D. (2007). Zero as a special price: The true value of free products. Marketing Science, 26(6), 742-757. DOI: 10.1287/mksc.1060.0254

Tversky, A., & Kahneman, D. (1981). The framing of decisions and the psychology of choice. Science, 211(4481), 453-458. DOI: 10.1126/science.7455683

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