Ups and Downs in Experience Design
58 Pages Posted: 13 May 2022 Last revised: 18 Jun 2023
Date Written: July 8, 2022
We showcase four general settings in experience design where the framework of prospect theory uncovers critical decision-making insights. First, we study the problem of releasing a piece of good news vs. bad news, where a service provider may incrementally reveal the news over a preemptive period. We characterize the optimal release strategy for both good and bad news and show that when the ultimate news is good (resp., bad) and the audience is sufficiently gain-seeking, it is optimal to first release information of a negative (resp., positive) sentiment. Second, we consider the problem of organizing an event such as a concert with performances of known valuations, where a service provider needs to arrange the sequence of all performances. We show that for both loss-averse and gain-seeking audiences, interior peaks can be optimal, where pleasant and aversive performances are arranged to alternate throughout the event. Third, we investigate the problem of simultaneous vs. sequential release of a series, such as songs or TV episodes, where a service provider does not know a priori the audience's exact valuation of each item. We show that if the audience's sensitivity to losses is sufficiently small (resp., large), the optimal strategy is to release all items in the series sequentially (resp., simultaneously). Lastly, we study the problem of deciding whether to perform first vs. second such as in soccer penalty shootouts, when both teams have initial expectations of their likelihood of success and are uncertain about whether they will perform well. We show that when expectations are high or if teams are sufficiently loss averse, the optimal decision is to perform second. Across all of the settings, we show that the audience's sensitivity to losses relative to a reference point is a critical factor that governs how to design and manage the audience's evolving experience dynamics.
Keywords: prospect theory, experienced utility, series release, news release, experiential service design
JEL Classification: D03, L82
Suggested Citation: Suggested Citation