Risk compensation (Peltzman effect)

Theory explained by Sander Volbeda and written by Sam Peltzman

Risk is an inevitable phenomenon that every one of us faces on a regular basis. Many of us act according to the perceived risk rather than gauging the actual risk involved in many cases. Let’s assume that there are two people at the edge of a rock to jump into a natural pool. One is wearing a life jacket and the other is not. What do you think about the risk perceived by both the people? Will they gauge the actual risk involved in an equal level? Even though both of them are at the exact same location and trying to jump off the cliff at the exact same time, there is a high tendency that the one who is wearing the jacket will have a less perceived risk than the other person, but why? It is the Pelzman effect known as the Risk Compensation in human psychology which is in action.

This cognitive bias was recognized by one of the economists, Sam Peltzman which describes that humans tend to adjust their behavior based on the risk they perceive than the real risk they face. He observed that the population who wears seatbelts while driving didn’t contribute to the reduced number of accidents as predicted by the government. The conclusion he came up with was the fact that the safer the people felt, more the risks they took in driving. The person who wears a seatbelt has the expectation that the seatbelt can protect him from accidents; therefore the perceived risk is lower than the actual risk. According to this tendency of human psychology, it’s clear that our internal risk-benefit analysis is based on perceived risks and the benefits rather than on hard data.

Risk Compensation in Digital Marketing

Risk compensation principle of human psychology can be clearly seen in online marketing. Regardless how well a business tries to influence the consumers’ decisions, people tend to see that some risk is associated with it such as risk of losing money, risk of losing time, risk of losing privacy etc. The ultimate key to get rid of this adverse consumer behavior is to make the consumers feel safe and sound acting towards the expectations of the businesses. To make them feel safe, you should be able to increase their perceived benefits while decreasing the perceived risks and by doing that, you can reap the benefit of the Conversion Rate Optimization (CRO).

How to optimize your website for conversions?

Clearly state your customer support policy, delivery policy and the return policy in the website This is practised by many well established ecommerce sites in order to reduce the perceived risks of their visitors a great deal. Not only embedding such details is enough, but you should act accordingly in order to keep the customers not disappointed. This level of authenticity can definitely assist you for Conversion Rate Optimization (CRO).

Use social proof to reduce perceived risk As the malpractices in marketing are widely in use nowadays, people tend to question or distrust the marketing attempts than before. However, people trust other people quite more strongly than marketers. Therefore, using social proof is an ideal method to use the Risk Compensation effect of human psychology to your favor. You can decrease the perceived risk by enabling the customers to post their reviews and testimonials. Never try to use fake reviews or testimonials though! If the visitors find the social proof not to be authentic, they can definitely backfire on you.

Use an influencer to endorse your brand This is a great way for Conversion Rate Optimization (CRO) used by many online marketers in order to influence the consumer decisions to their favor by using a third party individual that their target audience trusts. It works as a trust seal to reduce the perceived risk in order to minimize the adverse effect of the Risk Compensation theory in human psychology. When selecting an influencer to endorse your brand, the first and foremost consideration should be to recognize the right persona admired by your target audience. Influencer marketing reaches a wider audience than mere reviews or testimonials because the influencers are expected to share your brand message in their personal channels; so it can definitely serve you well for Conversion Rate Optimization (CRO).

Wrap Up

People tend to perceive risks differently than their actual weights under different conditions which is discussed as the Risk compensation or the Pelzman effect in human psychology. Even though the way people perceive risks and benefits are not in your complete control, by strategically approaching them with the top tips we’ve briefed above, you can reduce the adverse effects of the Risk Compensation theory (Pelzman effect) for Conversion Rate Optimization (CRO). It’s time to optimize your digital marketing attempts.

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