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Prospect theory is a theory of behavioral economics, ... (termed the reflection effect), can also be explained by referring to the prospect theory. ...
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.
The disposition effect has been described as one of the foremost vigorous actualities around individual investors because investors will hold stocks that have lost value yet sell stocks that have gained value." [2] In 1979, Daniel Kahneman and Amos Tversky traced the cause of the disposition effect to the so-called "prospect theory". [3]
Prospect theory can explain the shift by assuming people open a mental account at the beginning of the day, close it at the end, and hate closing an account in the red. [ 3 ] The end-of-the-day betting effect is consistent with the risk aversion / risk seeking behaviors associated with prospect theory, which state that people are more likely to ...
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]
This effect was first presented by Kahneman and Tversky as a part of the prospect theory, in the behavioral economics domain. The reflection effect is an identified pattern of opposite preferences between negative as opposed to positive prospects: people tend to avoid risk when the gamble is between gains, and to seek risks when the gamble is ...
The description-experience gap is a phenomenon in experimental behavioral studies of decision making.The gap refers to the observed differences in people's behavior depending on whether their decisions are made towards clearly outlined and described outcomes and probabilities or whether they simply experience the alternatives without having any prior knowledge of the consequences of their choices.
The main modification to prospect theory is that, as in rank-dependent expected utility theory, cumulative probabilities are transformed, rather than the probabilities themselves. This leads to the aforementioned overweighting of extreme events which occur with small probability, rather than to an overweighting of all small probability events.