Prospect Theory and Realm of Losses: Why I so Angry WIth my Contactor

14 Oct

I am currently having my basement finished. The project was supposed to take six weeks, but is now entering week 17 (You can read more about it at our family blog). Until last week I was being very patient about the situation, but I finally lost my patience with my contractor and even sent a letter threatening a lawsuit after he didn’t show up for an appointment with me on Friday. Even though we are so close to being finished, I was willing to end the whole project. After talking with him the last few says, I feel like he is somewhat blindsided by the sudden hostility and mistrust emanating from me. He really feels like he has been a good contractor and, objectively, he really has been. So why am I so angry with him, why does he feel my anger is irrational, and how is this likely to play out? I think the answer can be found in prospect theory.

Prospect theory, in a nutshell, says that people make decisions based on an evaluation of risk (i.e., gains and losses) based on a reference point and that we are more adverse to losses than we motivated by gains. Prospect theory says that because I have a different reference point than my contractor about the utility of the basement remodel, we will have different interpretations about how the project is unfolding. Since my reference point is my basement before the remodel, the fact that I now have a basement that is less usable to me now puts me in the realm of losses. I am not willing to take additional risks like paying the contractor more money before he completes everything little thing we have already paid him for, even if that slows down the process and makes me suffer more in the long run. My contractor’s reference point is the finished basement he has visualized in his head, which means that from his view I am entirely in the realm of gains. He has done great work and my sudden hostility makes little sense when evaluated from this perspective. Of course, the reality is that I am not in the realm of gains because I have not realized any of the gains from the remodel. The long delay has made it even more difficult for me to envision myself in a swanky new basement.

What I hope will happen in this situation is that my contractor will deliver a bunch of doors to my house next week, which we paid for in August, and this gesture will restore some of my confidence in the project. If my contractor can help me to realize some gains in in this endeavor, my reference point may shift back to visions of a finished basement and the problem will be solved.


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