Prospect Theory and Transaction Architecture

Max Ganhewa
Max Ganhewa
Founder & CEO

Watch a service expert work for an entire day, and you will likely see them operate in two different modes, often without noticing the switch.

The first mode is for small, urgent jobs. A broken filling. Bandaging a paw. A puncture repair. A patch on a hot water cylinder. The customer is in pain or inconvenienced, the price is low, the solution quick and the decision and transaction all happens on the day. Call this Type 1.

The second mode is for large and pricey jobs. Dental implants. Surgery for the dog. Four tires. A new hot water cylinder. The price runs from thousands to tens of thousands, and the customer needs time, evidence, and usually a conversation with someone trusted before they commit. Call this Type 2.

The re-mode

The expert drifts in and out of type 1 and type 2 during their day, and sometimes during the same customer conversation.

Kahneman split thinking into two systems. System 1 is fast, intuitive, decisive. System 2 is slow, effortful, deliberate. Type 1 jobs seem to run almost entirely in System 1. Both the expert and customer are quick and sure, the conversation is verbal and full of eye contact, and the job closes without anyone overthinking.

Type 2 is different. The moment the expert says ‘while we’re here, there's something we should talk about’, they are asking the customer to shift gears. From fast to slow. From going with the flow to weighing the evidence. The customer has to re-mode often without warning, and the expert is rarely aware they have asked for it.

In my experience, experts that are good at type 2 conversations are very successful. Experts that are not have careers filled with low value transactions.

Significant money

Why does Type 2 slow everything down? Prospect theory gives an answer.

People don't judge a price in the abstract. They judge it against a reference point, and for most of us that reference point is either our fortnightly pay or the amount of money in our everyday bank account. A $ quote well below it, say a tenth or less, barely registers. A $ quote that sits at or above the reference point is a different beast. It crosses what the customer perceives as “significant” and both brains shift into slow, defensive and tactical mode.

Type 2 is not necessarily predatory

It is tempting to read all of this as a warning. Expert pivots to selling to extract as much money as possible from their customers.

That is the wrong conclusion. The customer often genuinely does need the multiple crowns. The cylinder really is about to fail. Type 2 work is frequently the most important and most beneficial work the expert will ever do for that customer.

When it's ethical to do so, the expert needs to meet the customer where they are, cognitively. If their brain has correctly shifted into slow, careful, evidence-weighing mode, then rushing them is a violation. Any competent seller will extol that education around the benefits of acting, the consequences of not acting etc told in simple language, with visual aids is often most effective.

What this asks of the expert

Two obligations follow, and they are the same obligation seen from two sides.

First, recognise the transition. Know when you have stopped doing the small job and started selling a big job, and know that you have just asked the customer to think differently.

Second, once you’re in a type 2 situation, equip the customer to decide. Once both are in System 2, the customer deserves enough information to make a genuinely informed choice. Not a faster yes. A better-founded one. An image that shows the problem clearly. The offer of a second opinion. The trend from the previous visit etc.

The same architecture, everywhere

The reason this matters beyond dentistry is that the architecture is identical across professions and trades. Dentists, vets, mechanics and plumbers are all running the same two-mode pattern against the same reference point. Different vertical, same decision and transaction architecture.

That is what makes it worth studying properly, and worth building for. The expert who learns to handle the re-mode with awareness and care, who sells into System 2 by showing, informing and empowering rather than pressing, gets better financial outcomes and trust at the same time.

Lastly, The two modes need not always be in tension. With experience, mentorship, continuous improvement and good technology, they can work in perfect harmony.