Loading...
Please wait, while we are loading the content...
Similar Documents
Prospect Theory: An Analysis of Decision under Risk
| Content Provider | Scilit |
|---|---|
| Author | Kahneman, Daniel Tversky, Amos |
| Copyright Year | 2000 |
| Description | This paper presents a critique of expected utility theory as a descriptive model of decision making under risk and develops an alternative model, called prospect theory. Choices among risky prospects exhibit several pervasive effects that are inconsistent with the basic tenets of utility theory. In particular, people underweight outcomes that are merely probable in comparison with outcomes that are obtained with certainty. This tendency, called the certainty effect, contributes to risk aversion in choices involving sure gains and to risk seeking in choices involving sure losses. In addition, people generally discard components that are shared by all prospects under consideration. This tendency, called the isolation effect, leads to inconsistent preferences when the same choice is presented in different forms. An alternative theory of choice is developed, in which value is assigned to gains and losses rather than to final assets and in which probabilities are replaced by decision weights. The value function is normally concave for gains, commonly convex for losses, and is generally steeper for losses than for gains. Decision weights are generally lower than the corresponding probabilities, except in the range of low probabilities. Overweighting of low probabilities may contribute to the attractiveness of both insurance and gambling. INTRODUCTION Expected utility theory has dominated the analysis of decision making under risk. It has been generally accepted as a normative model of rational choice (Keeney & Raiffa, 1976), and widely applied as a descriptive model of economic behavior, e.g. (Friedman & Savage, 1948; Arrow, 1971). Thus, it is assumed that all reasonable people would wish to obey the axioms of the theory (von Neumann & Morgenstern, 1944; Savage, 1954), and that most people actually do, most of the time. |
| Related Links | http://www.dklevine.com/archive/refs47656.pdf |
| Ending Page | 43 |
| Page Count | 27 |
| Starting Page | 17 |
| DOI | 10.1017/cbo9780511803475.003 |
| Language | English |
| Publisher | Cambridge University Press (CUP) |
| Publisher Date | 2000-09-25 |
| Access Restriction | Open |
| Subject Keyword | Choices, Values, and Frames Expected Utility Theory Analysis of Decision Decision Making Under Risk |
| Content Type | Text |
| Resource Type | Article |
