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Prospect theory and loss aversion suggests that most people would choose option B as they prefer the guaranteed $920 since there is a probability of winning $0, even though it is only 1%. This demonstrates that people think in terms of expected utility relative to a reference point (i.e. current wealth) as opposed to absolute payoffs.
At the time Thaler's conceptualisation of the endowment effect was in direct contrast to that of accepted economic theory, which assumed humans were completely rational when making decisions. Through his contrasting viewpoint, Thaler was able to offer a clearer understanding of how humans make economic decisions. [ 18 ]
Familiarity bias simply describes the tendency of people to return to what they know and are comfortable with. Familiarity bias discourages affected people from exploring new options and may limit their ability to find an optimal solution. [71] Status quo bias. Status quo bias describes the tendency of people to keep things as they are. It is a ...
The Cognitive Bias Codex. A cognitive bias is a systematic pattern of deviation from norm or rationality in judgment. [1] [2] Individuals create their own "subjective reality" from their perception of the input. An individual's construction of reality, not the objective input, may dictate their behavior in the world.
A hot-cold empathy gap is a cognitive bias in which people underestimate the influences of visceral drives on their own attitudes, preferences, and behaviors. [1] [page needed] It is a type of empathy gap. [1]: 27 The most important aspect of this idea is that human understanding is "state-dependent".
Self-selection bias or a volunteer bias in studies offer further threats to the validity of a study as these participants may have intrinsically different characteristics from the target population of the study. [19] Studies have shown that volunteers tend to come from a higher social standing than from a lower socio-economic background. [20]
Reference dependence is a central principle in prospect theory and behavioral economics generally. It holds that people evaluate outcomes and express preferences relative to an existing reference point, or status quo. It is related to loss aversion and the endowment effect. [1] [2]
Status quo bias has been attributed to a combination of loss aversion and the endowment effect, two ideas relevant to prospect theory.An individual weighs the potential losses of switching from the status quo more heavily than the potential gains; this is due to the prospect theory value function being steeper in the loss domain. [1]