29.06.2016

Lottery Prizes and the Adage that 'Less is More'

YAN, Dengfeng | MUTHUKRISHNAN, A V

The candy maker M&Ms offers a lucky draw with a chance to win the grand prize of a new car or one of thousands of coupons for a free pack of candy. Wellcome supermarket in Hong Kong offers scratch-and-win cards with a large cash prize to the winner and numerous discount coupons and other rewards as consolation prizes. How do customers view such offerings?

The intuitive answer is that they would react positively – they win a prize no matter what – and that this would make them more willing to participate in the lottery. But research by Dengfeng Yan and A.V. Muthukrishnan has found a surprising effect from consolation prizes: they make customers more aware of the low probability of winning the big prize, so they are less likely to want to participate.

“Economic theories of consumer choices under risk would predict that given a choice between two lottery designs, consumers are more likely to participate in one with token prizes because it offers greater expected value,” they said.

“We found that when the lottery contains big prizes only, consumers tend to focus on the value of the big prize. But when consolation prizes are added, this makes the high probability of winning the smaller prize – in contrast with the low probability of winning the bigger prize – more salient, leading consumers to give greater weight to the dimension of probability. These prizes reduce both consumers’ expectations about winning the big prize and their intention to participate in these lotteries.”

The findings were based on four experiments that tested responses with and without consolation prizes (the word “consolation” was not used so as not to trigger an association with losing); with varied probability of winning a consolation prize, from a few dozen such prizes to guaranteed for every participant; and with varied probability of winning the grand prize from one to 50. Variation in the size of the grand prize was also tested. Participants were also asked how much they would be willing to pay to participate in a lottery.

In all cases, participants indicated greater intent to enter a lucky draw or lottery without consolation prizes, and they also perceived that they had a greater likelihood of winning the grand prize. Participants were willing to pay nearly twice as much to participate in a lottery without consolation prizes versus one with guaranteed prizes (a mean of HK$82.69 vs HK$42.95).

“When a lottery contains big prizes only, people will be more focused on the value of those big prizes and this leads to optimistic estimates of their winning odds. This could be due to innate optimism under uncertainty, wishful thinking, or mental simulation of the desirable outcome,” the authors said.

However, the same effects were not seen when the consolation prizes themselves were only available in limited quantities. “This pattern supports our argument that the mere presence of a small prize is not sufficient to cause a shift in focus,” they said. Rather, it is the focus on probability that matters.

The results have implications for researchers and marketers, given the insights on the psychology of risky decision-making.

“Other models have suggested that a strategy for maximising the value of promotions for consumers who are risk neutral to gain but risk averse to loss is to offer a single grand prize and several smaller prizes. Our findings suggest the opposite.

“Hope, which is the foundation of lotteries in marketing promotions, could be killed in a subtle manner without marketers’ awareness and contrary to their intentions. Our findings show that ‘more is less’ and ‘less is better’.”

Marketers should welcome the findings because of their implications for efficacy and cost. Promotional lotteries with no consolation prizes are not only cheaper, but may be more valued by consumers, who may then be more likely to participate.

Even managers outside the realm of marketing can benefit because the insights have implications for formulating actions and decisions that have high rewards but low probabilities. “In such contexts, our findings suggest it would be better to exclude small rewards with high probability of attainment if the objective is to encourage risk-taking,” the authors said.

MUTHUKRISHNAN, A V

Professor
Marketing