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Prospect theory is a theory of behavioral economics, judgment and decision making that was developed by Daniel Kahneman and Amos Tversky in 1979. [1] The theory was cited in the decision to award Kahneman the 2002 Nobel Memorial Prize in Economics .
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 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.
Prospect theory posits that a loss is more significant than the equivalent gain, [2] that a sure gain (certainty effect and pseudocertainty effect) is favored over a probabilistic gain, [3] and that a probabilistic loss is preferred to a definite loss. [2]
Literary theory is the systematic study of the nature of literature and of the methods for literary analysis. [1] Since the 19th century, literary scholarship includes literary theory and considerations of intellectual history , moral philosophy, social philosophy, and interdisciplinary themes relevant to how people interpret meaning . [ 1 ]
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]
Hanemann (1991), [25] develops a neoclassical explanation for the endowment effect, accounting for the effect without invoking prospect theory. Figure 2 presents this explanation in graphical form. In the figure, two indifference curves for a particular good X and wealth are given.
Theory of Literature is a book on literary scholarship by René Wellek, of the structuralist Prague school, and Austin Warren, a self-described "old New Critic". [1] The two met at the University of Iowa in the late 1930s, and by 1940 had begun writing the book; they wrote collaboratively, in a single voice over a period of three years.