Daniel Kahnemann reference point chart


Fore! US Open Championship is underway and with it a sport ripe for embracing failure, but Daniel Kahneman also highlights its lessons for risk-balancing Leadership and Management.

I have always said that upside-oriented Leadership and downside-averting Management needed to be applied in ‘appropriate balance’. My primary concern was the ‘risk landscape’ – a climate with more opportunity (relative to downsides) would call for a greater proportion of ‘Leadership’ and vice versa. But Kahneman highlights that it is not just the ‘external’ landscape, but the ‘internal’ profile that is invariably a factor when finding the right balance. The ‘internal’ profile is ‘psychological value of gains and losses.’ He illustrated the concept with research on golfers…

“Economists [Devin Pope and Maurice Schweitzer at the University of Pennsylvania] reasoned that golf provides a perfect example of a reference point: par…The economists compared two situations a player might face when near a hole: (a) putt to avoid bogey, (b) putt to achieve birdie…They analysed more than 2.5 million putts…Whether the putt was easy or hard, at every distance from the hole, the players were more successful when putting for par than for birdie.”

A powerful instance of ‘loss aversion’. The findings reinforce a concept long held in business that people will work hard to achieve the targets presented to them. But today this concept often gets misapplied is when clueless managers think that setting a target of a hole-in-one for every hole will somehow inspire miraculous performance. Kahneman’s Reference Point model actually provides a means to look at a number of risk scenarios and anticipate how people will approach them.

“If Prospect Theory’ had a flag, this image would be drawn on it,” notes Kahneman. Maybe something to put on the green flags at the Leadership and Management Golf Club.