In This is Your Brain on Money, I mentioned that I’d visit some of the other neuromarketing-related topics raised in Jason Zweig’s interesting article in Money, Your money and your brain. One of these is that our brains are programmed for “reward anticipation” but aren’t very good at calculating odds. Big potential rewards produce big responses, even if they are unlikely outcomes:

Brian Knutson [of Stanford University] has found that while your reflexive brain is highly responsive to variations in the amount of reward at stake, it is much less sensitive to changes in the probability of receiving a reward.

If a lottery jackpot was $100 million and the posted odds of winning fell from one in 10 million to one in 100 million, would you be 10 times less likely to buy a ticket? If you’re like most people, you probably would shrug, say “A long shot’s a long shot” and be just as happy buying a ticket as before.

That’s because, as economist George Loewenstein of Carnegie Mellon University explains, the “mental image” of $100 million sets off a burst of anticipation in the reflexive regions of your brain. Only later will the analytical, or reflective, areas calculate that you’re less likely to win than Ozzy Osbourne is to be elected Pope.

This human inclination has implications for marketers who use contests, sweepstakes, or other prize offerings. These findings suggest that it’s the magnitude of the grand prize that is the most important in a giveaway. If you have a budget for total prize money or merchandise, it’s probably better to load it into the top-level prize than to try to spread it among a larger number of prizes that would increase the odds of winning for all contestants.

Want Insurance on That Bet?

Conventional wisdom at the blackjack table is to decline the insurance offered by the dealer, but for marketers insurance might make sense if it allows a bigger prize. An example that comes to mind is the common “million dollar hole-in-one” fundraiser. Golfers (and perhaps some non-golfers) make a donation to enter the contest for a chance at winning a million dollars by shooting a hole-in-one. There are various rules to reduce the probability of the million dollars actually being paid out, notably that the winning shot doesn’t take place in the qualifying round when hundreds of golfers may be whacking multiple balls at the cup; it takes place in a final session, when just one or a few golfers (who placed closest to the hole in the first round) get a shot. The other technique that minimizes the risk to the charity (a good thing, since a lucky shot might turn a fundraiser into a financial disaster) is that they buy insurance. By paying a tiny fixed sum to a firm that offers such coverage (and who ensures the rules of the game limit the probability of a payout), the charity can offer the million-dollar challenge with no fear of catastrophic loss.

The reason those fundraisers attract entrants is the magnitude of the potential payout. The cost of hole in one insurance for a million dollars might be as little as a few hundred dollars depending on the method of payout (multi-year annuity vs. cash) and the number of shots that will qualify (giving one finalist one shot vs. multiple finalists with multiple attempts). From the standpoint of an individual competitor, awarding a few $1,000 prizes to those closest to the hole would have a higher expected payout than the opportunity to qualify for a million dollar shot, but would it generate any excitement? Probably very little. In short, awarding five $1,000 prizes would cost the charity a lot more than hole-in-one insurance for a million dollar prize, and would almost certainly result in fewer entrants and less excitement.

Business contests have different motivation than charity fundraisers, but the same principles apply – a spectacular prize is better, even if the odds are greatly reduced. (One exception may be high-frequency awards, like those in some fast-food restaurant contests; in these, there is a high concentration of winning game pieces with small awards, like free french fries. The promise of an immediate, high probability food reward brings other factors into play that are beyond the scope of this topic.) But, when choosing a top-line prize, think BIG – even if the odds are lower, people will respond better if there are more zeros at the end of the number. Possible approaches could be to concentrate prize money in one prize, to use a playoff system with the possibility that no prize will be awarded (in essence the hole in one strategy), or to participate in a joint promotion with other companies to increase the prize budget. (Note that in most jurisdictions contests are subject to government rules and regulations, so be sure to jump through the appropriate legal hoops in any such promotion.)

For a neuromarketing perspective on another game of chance, see Deal or No Deal.

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