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It is an idea introduced in prospect theory. Normally a reduction in the probability of winning a reward (e.g., a reduction from 80% to 20% in the chance of winning a reward) creates a psychological effect such as displeasure to individuals, which leads to the perception of loss from the original probability thus favoring a risk-averse decision.
Prospect theory is a theory of behavioral economics, ... High probability (certainty effect) 95% chance to win $10,000 or 100% chance to obtain $9,499. So, 95% × ...
Pages in category "Prospect theory" The following 28 pages are in this category, out of 28 total. ... Certainty effect; Cumulative prospect theory; D. Description ...
Most theoretical analyses of risky choices depict each option as a gamble that can yield various outcomes with different probabilities. [2] Widely accepted risk-aversion theories, including Expected Utility Theory (EUT) and Prospect Theory (PT), arrive at risk aversion only indirectly, as a side effect of how outcomes are valued or how probabilities are judged. [3]
Kahneman and Tversky utilising prospect theory determined three generalisations; gains are treated differently than losses, outcomes received with certainty are overweighed relative to uncertain outcomes and the structure of the problem may affect choices.
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In prospect theory, the pseudocertainty effect is the tendency for people to perceive an outcome as certain while it is actually uncertain in multi-stage decision making. The evaluation of the certainty of the outcome in a previous stage of decisions is disregarded when selecting an option in subsequent stages.
The zero effect is a slight adjustment to the certainty effect that states individuals will appeal to the lottery that doesn't have the possibility of winning nothing (aversion to zero). During prior Allais style tasks that involve two experiments with four lotteries, the only lottery without a possible outcome of zero was the zero-variance ...