Psychological Risk Aggregation: Selling Products of Uncertain Qualities with Probabilistic Promotions

Companies often market products of uncertain qualities with probabilistic promotions (e.g., 50% chance of getting 15% off; 50% chance of getting 45% off). A product provides uncertain qualities to consumers either because it is new to the market or because the product is inherently risky (e.g., investment products). When such products with uncertain qualities are promoted with probabilistic rewards, consumers need to aggregate two sources of risks (product and promotion risks) and evaluate them jointly to decide the attractiveness of the deal package. This paper studies consumers’ psychological reactions to aggregated risks from independent sources. Our paper extends the existing literature on probabilistic promotions that has focused on consumer responses to the uncertain nature of the probabilistic promotions, comparing their performance relative to fixed promotions (Goldsmith and Amir 2010, Mazar, Shampanier, and Ariely 2012) or exploring the optimal design of reward structure (Kalra and Shi 2010). Most of the existing studies, by examining either established brands such as Nike athletic shoes, Amazon gift cards, and M&M’s or hypothetical ones, have neglected the potential performance uncertainty in the products being promoted.