By The Boy Who Procrastinates - March 09, 2019

Picking up where I left off, I will be focusing on one of the fundamental concepts of behaviorial economics introduced in the book. 

Prospect Theory

The prospect theory was developed by psychologists, Daniel Kahneman and the late Amos Tversky, as a theory of decision-making under conditions of risk and uncertainty. 

It runs contrary to the normative implications inherent in the classical theory of expected utility by mathematician Daniel Bernoulli (even though he has used the St. Petersburg paradox to demonstrate the limitation of expected value as standard decision rule). Instead, the prospect theory presents a more psychologically accurate model of human decision-making. 

It posits that (1) people make choices by framing around a reference point and that (2) people tend to overweight losses with respect to comparable gains and respond to the probabilities of such outcomes in a nonlinear fashion.  Certainty Problem 1: Which...