By The Boy Who Procrastinates - July 31, 2019
In the previous few posts, I have touched on the topics of Anchoring Effect, Prospect Theory and Endowment Effect in the book review of Thinking, Fast and Slow by Daniel Kahneman.
Building on the concept of loss aversion, we will explore another fundamental shortcoming that may lead to irrational decisions and common financial mistakes. A Brilliant Mistake Imagine that you are presented with the following pair of concurrent decisions and asked to examine both decisions before making your choice.
Decision (i): Choose between
A. Sure gain of $240
B. 25% chance to gain $1,000 and 75% chance to gain nothing
Decision (ii): Choose between
C. Sure loss of $750
D. 75% chance to lose $1,000 and 25% chance to lose nothing.:
:
As elucidated in Prospect Theory and Loss Aversion, most people tend to overweigh options that are certain and adopt a risk...