Why Prospect Theory has a Role in Your Business Case for Business Continuity

Cloud computing and risk mitigation, OK – but when pundits start linking business continuity plans and “prospect theory”, discussions can run deep indeed. What do the two have in common? To answer a question like that, you first have to know what prospect theory is about. In a simple form, it describes how people make decisions and the kind of irrationality that sometimes accompanies them. Another name for prospect theory is “loss aversion theory”, which refers to the preference that people often have for making decisions based on potential gains, rather than potential losses. And it’s there that a link exists with the business case for business continuity.

Prospect theory was largely developed by Daniel Kahneman and Amos Tversky. In 1979, they published their work under the title “Prospect Theory: An Analysis of Decision under Risk”. As an example of how this applies in the world at large, consider an investment plan presented by one financial advisor as having had an average return of 6% over the last four years; and the same investment plan presented by another financial advisor as having done well over the past eight years, but with performance dropping off over recent years. Despite the plan being identical, people will be more likely to buy from the first advisor – or if you prefer, not buy from the second one.

Because a business case for business continuity is also open to the same kind of manipulation, it stands to reason that how you present such figures can influence management decisions about investing in BC. After all, you’re still dealing with human beings. Although ethical practice demands that all the relevant information is made available in a clear and unbiased way, a simple choice of words can influence people markedly. Sometimes half a dozen of one is not equal to six of the other.