“Risk theory” sounds sexy — like the code name for a Fast and Furious stunt.
Or some awesome spy movie about hackers and people blowing up stuff.
In reality, risk theory is a whole lot more boring, yet a whole lot more exciting at the same time.
It’s boring, because it has to do with medical research journals and dusty peer-reviewed experiments from the Journal of Abstruse Esoteric Experimental Theoretical Ontological Psychosocial Research.
It’s exciting, because its implications and applications can rock your conversion optimization world.
Here’s what you need to know about risk theory and its earth-shattering impact on the world of conversion optimization.
Disambiguation: What is risk theory?
Technically the term “risk theory” is the label of a statistical decision theory stating that risk function is the expected value of a given loss function as a function of the decision rule used to make decisions in the face of uncertainty.
Wha-?! Yep. Boooooooooorrring.
I’m referring to “risk” more broadly. My approach to risk is to investigate how risk taking has a role in conversion optimization.
The world of risk psychology is huge. If you ever get a hankering for doing some scintillating research, just do a little poking around in the medical literature and research.
But if you just want the brass tacks on how to apply risk theory to your website, you’ve come to the right place.
Why you need to understand risk theory.
The customer views every purchase (conversion) as a risk.
The whole idea of buying something is viewed as risky. Every purchase decision is a decision to part with one’s hard-earned cash and exchange it for an untested, unproven product or service.
Such a decision is a risk. Why? Because money is valuable, and the value of the product or service is unknown.
Basically, life is a risk. Every action is a risk. But to be specific, risk has a very clear and present application when the customer is faced with a decision to buy or not.
What should you do about this? That’s what the rest of this article will explain.
For now, the truth I want you to realize is this. When you are asking a customer to buy, you are asking them to take a risk.
There are a billion variables that affect this risk-laced decision. For example, if the customer has a lot of money, the risk is lower and their risk appetite may be higher. Or, if the customer views the prospect of not having the product/service as a greater risk than buying it, than the risk equation is reversed.
Complexities aside, it’s important that you realize that risk in conversion is a thing. It affects every user who has ever clicked “buy now” or added an item to her shopping cart.
Most people are risk averse.
Generally speaking, people are risk-averse.
Risk aversion is the psychological label for this. It means that most people would prefer a sure outcome than to take a risk at something that has potentially higher value.
Here’s what it looks like. You have a choice:
- Choice A: You will receive $50.
- Choice B. You will flip a coin and receive $100 or nothing.
Which would you pick?
Most people prefer to take the safe one — a surefire $50 rather than potentially nothing. Why? Because there is less risk in such a choice. The path of less risk is the naturally tendency for most people.
How do you apply this idea to conversion optimization? Broadly speaking, you minimize the sense of risk. There are hundreds of practical ways to do this. Here are a few of them:
- Use words such as “safe,” “safety,” “sure,” “guaranteed” and even “risk-free.”
- Keep the price as low as possible.
- Offer a money-back guarantee.
- Focus on the low cost combined with the high value of the product.
A company like Delta is forthright with its declaration against risk. They advertise a “risk-free cancellation” for some flight purchases.
There are three main approaches to risk.
It’s safe to say that most people are risk-averse. However, there are different approaches to taking risk.
- Risk-Averse, discussed above, are people who prefer a sure outcome to a risky, yet possibly more valuable outcome.
- Risk-Neutral, a middle-ground group, exhibit no pronounced preference for one over the other.
- Risk-Loving, also known as risk-seeking, are people who generally accept the non-guaranteed but potentially higher-value decision. When faced with the decision between Choice A ($50 guaranteed) or Choice B (possible $100), they are likely to go with Choice B, even if the likelihood of a payout with Choice A is higher.
Risk researchers plot these different approaches on a graph, showing how the utility function (the level of willingness to take a risk), ranges based on the certainty equivalent vs. uncertainty payment.
Here is the utility function of a risk-averse person:
Here is the utility function of a risk-neutral person:
Here is the utility function of a risk-seeking person:
What kind of people are most likely to buy your product or service? Research your target audience to find out if they are generally risk-averse, risk-neutral, or risk-loving. You may be surprised by what you find.
Your research into your target audience is the best way to determine risk appetite, but here is what the research says about risk-willing and risk-neutral individuals:
- Men are more likely to take risks than women. (source)
- Generally optimistic people are more likely to task risks. (source)
- Younger people, especially teens, are more risk-loving. (source)
- Athletes enjoy risk. (source) Many athletic behaviors are risky — swimming, rock climbing, hiking, mountaineering, spelunking, etc. The risk appetite of such individuals is generally pretty high.
- Single or unattached people are more risk-prone. (source) When someone has few dependents or human attachments, they are more likely to embrace risk. A single person with no spouse, children or close family members is willing to take risks because there is little repercussion to a disastrous outcome.
- Happier people take more risks. (source)
- People are more likely to take risks on sunny summer days. (source)
- Some people are genetically prone to risk-taking. (source)
- Night owls are more likely to be risk-takers. (source)
- Risk-taking begets more risk-taking(source)
- People who generally prefer risk also exhibit high levels of alcohol consumption, substance use, sexual activity, fast driving, gambling. (source)
At the risk of offending everyone and stereotyping, let’s get even more practical:
- If your customer base is primarily women, expect them to be risk-averse.
- If you sell B2B, expect your customers to be risk-averse.
- If you sell to high-net-worth individuals, expect them to be risk-averse.
- If you sell to highly educated people, expect them to be risk-averse.
- If you sell to programmers, developers, accountants, or lawyers, expect them to be risk-averse.
- If you sell to young people, expect them to be risk-seeking.
- If you sell to artists (e.g., musicians, graphic designers), expect them to be risk-seeking.
- If you sell to lovers of hard rock, expect them to be risk-seeking.
It’s important also to realize that someone might be risk-seeking in one area, but risk-averse in another area. For example, an athlete may be willing to take huge risks with his hobby as a base jumper.
When it comes to investment, however, he may be extremely risk-averse, choosing to keep all his money in a CD or bank rather than active investments.
Timothy Sykes is an investment coach who tells people how to invest in penny stocks. He makes a lot of money off of risk-willing suckers. But he nails it.
He knows that his best customers are people who go hard, think fast, and want big payoffs — even in the face of big risks.
Take a look at his advertising methodology:
His approach is tough, smart and, yep, risky.
He focuses on the reward — the classic risk-seeker motivator. His articles about private jets, fancy vacations and expensive sports cars make the risk-seeker even more in love with the idea of pouring their cash into the penny stock market.
Sykes is an example of a guy who knows his target audience and delivers the risk-seeking behavior that will help him make bank.
How to apply risk theory.
1. People perceive large or stable companies as less risky purchases.
Which would you rather bank with — Wells Fargo or Jim’s Bank?
Since you’ve never heard of Jim’s Bank (or maybe you have), you’re probably not likely to go with them. They’re new, untried, untested.
They are a risk.
People trust the big and recognized, not the new and upstart. There are plenty of logical reasons for such a decision, but it still puts the little guy at a disadvantage.
There are, however, ways to overcome this challenge.
Associate your brand with other big brands.
This is pretty easy to do. Simply feature their logos on your website.
This is what the startup AudienceBloom does:
Provide customer studies.
Another way to reduce risk is by showing how you, a smaller company, are a partner of larger and more-trusted companies.
Here’s a small B2B marketing agency, Gyro:, using this approach:
This technique basically rides the coattails of companies that don’t inspire the risk factor in customers. Simply featuring their logos or claiming their names can help reduce risk.
2. People prefer not taking risk.
I love cognitive biases — learning about them, that is, not doing them.
One such bias is known as the "zero-risk bias." The zero-risk bias is the human tendency to prefer no risk whatsoever, even if other options would reduce the overall risk.
Let me explain it. In general, people really want to avoid risky situations. But in their zealous elimination of risk, they are actually ignoring a present risk that is riskier than the elimination of the risk.
We see such irrational risk-aversion played out in public policy, and yes, in conversion optimization, too.
Although it is played out in myriad complex ways, the bottom line is simple: People don’t like risk. People avoid risk. People stay away from risk.
Since people don’t like risk, don’t merely take it away. Instead, reverse it.
Risk reversal is a financial term that refers to a hedge strategy involving selling a call and buying a "put option." Again, booorrring.
But in conversion optimization, risk reversal has a more exciting meaning. Risk reversal is the use of risk-reducing techniques that turn a risky buying experience into a safe experience.
What are these risk-reversing techniques?
- Return Policies.
“Conversion Scientist” Brian Massey describes it this way:
“Risk reversal” turns “risky” into “safe.”
Zappos is one of the most famous examples of employing risk-reversal in their conversion funnel. Any purchase can be exchanged or returned.
This generous policy is one of the reasons for the success of an online e-commerce startup. They envisioned a conversion experience with no risk, and brainstormed a policy that gave customers exactly what they innately craved.
Basically, Zappos allows customers to buy whatever they want and send it back if they don’t like it. The big risk of the e-commerce transaction is successfully deleted from the equation, making it easier for customers to buy.
A big company like Apple has a generally trusted product. But even with the risk-free nature of such a purchase, they offer warranties and guarantees.
3. Risk is lowered with every subsequent purchase.
Every time a customer makes a purchase from you, they feel less risk.
There are a couple things going on. For one, people who take a single risk tend to take more risks. More directly applicable, however, is the truth that a repeated action becomes less risky, a movement of risk experience that operates on the relationship principles of the Nash equilibrium.
The first time you jump out of an airplane, you have a hard time taking the risk. You’re so scared that you want to pee in your jumpsuit.
But if you jump out of airplanes for a living (or have iron cajones), then you’re totally cool with it after a while.
The risk is no longer risky.
The same is true for e-commerce purchases. What was eventually a big risk is now a routine purchase.
It’s not just purchases, though. Every time a visitor returns to a site, they experience a lowering of the risk level. Thus, every subsequent visit to the website nudges them closer to a purchase as their sensation of risk drops lower and lower.
Take shopping cart abandonment rates, for example. The average rate is 68%, but that rate is deceptively high. The cadre of second- or third-time site shopping cart users are not abandoning at those rates. Why? They are more likely to purchase because they are overcoming risk and drawing closer to a purchase.
- Encourage people to return and purchase through loyalty programs.
- Use retargeting campaigns for previous buyers or visitors.
In conclusion, there are just five major things to know about risk:
- The customer views every purchase (conversion) as a risk.
- There are different approaches to risk — risk-averse, risk-neutral and risk-loving.
- Most people are risk-averse.
- People prefer not taking any risk at all.
- Risk is lowered with every subsequent purchase.
There are hundreds of applications to conversion optimization. My suggestions for “conversion optimization takeaways” are cursory at best, but will at least help you to get started.
The main thing remains the main thing: Risk in conversion optimization is a reality. Overcoming it is the crucial task of the expert conversion optimizer.