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Kahneman and Tversky’s Prospect Theory posit that individuals have loss aversion. What is loss aversion? It means that individuals experience losses more intensely than gains of the same magnitude; for instance, the psychological impact of losing a certain amount of money is greater than the pleasure derived from gaining that same amount. A key question…
Nobel prize winner Daniel Kahneman passed away today. His work incorporating psychology into economics through Prospect Theory has been a major advance. From the N.Y. Times obituary: Professor Kahneman delighted in pointing out and explaining what he called universal brain “kinks.” The most important of these, the behaviorists hold, is loss-aversion: Why, for example, does…
Prospect theory states that individuals view transactions relative to a fixed reference point. Individuals are risk averse for gains (i.e., they would prefer $10 for sure over a 50/50 of winning $0 or $20) but risk loving over losses (i.e., they would prefer a 50/50 ‘lottery’ of losing $0 or $20 over a sure loss of $10.…
If you have $50, would you rather lose $30 or keep $20. After a little bit of thought, you probably realize that these are the same thing. Experimental economists, however, have generally found that individuals will go to great lengths to avoid the $30 loss. This phenomenon is named loss aversion. In prospect theory, loss…