Prospect Theory: An Analysis of Decision under Risk

@article{citeulike:99680, abstract = {This paper presents a critique of expected utility theory as a descriptive model of decision making under risk, and develops an alternative model, called prospect theory. Choices among risky prospects exhibit several pervasive effects that are inconsistent with the basic tenets of utility theory. In particular, people underweight outcomes that are merely probable in comparison with outcomes that are obtained with certainty. This tendency, called the certainty effect, contributes to risk aversion in choices involving sure gains and to risk seeking in choices involving sure losses. In addition, people generally discard components that are shared by all prospects under consideration. This tendency, called the isolation effect, leads to inconsistent preferences when the same choice is presented in different forms. An alternative theory of choice is developed, in which value is assigned to gains and losses rather than to final assets and in which probabilities are replaced by decision weights. The value function is normally concave for gains, commonly convex for losses, and is generally steeper for losses than for gains. Decision weights are generally lower than the corresponding probabilities, except in the range of low probabilities. Overweighting of low probabilities may contribute to the attractiveness of both insurance and gambling.}, author = {Kahneman, Daniel and Tversky, Amos }, citeulike-article-id = {99680}, journal = {Econometrica}, keywords = {choicebehavior, economics, human, risk, utility}, number = {2}, pages = {263--292}, posted-at = {2005-02-20 20:00:01}, priority = {4}, title = {Prospect Theory: An Analysis of Decision under Risk}, url = {http://www.jstor.org/stable/1914185}, volume = {47}, year = {1979} }

TY - JOUR ID - citeulike:99680 L3 - citeulike-article-id:99680 TI - Prospect Theory: An Analysis of Decision under Risk JF - Econometrica VL - 47 IS - 2 SP - 263 EP - 292 N2 - This paper presents a critique of expected utility theory as a descriptive model of decision making under risk, and develops an alternative model, called prospect theory. Choices among risky prospects exhibit several pervasive effects that are inconsistent with the basic tenets of utility theory. In particular, people underweight outcomes that are merely probable in comparison with outcomes that are obtained with certainty. This tendency, called the certainty effect, contributes to risk aversion in choices involving sure gains and to risk seeking in choices involving sure losses. In addition, people generally discard components that are shared by all prospects under consideration. This tendency, called the isolation effect, leads to inconsistent preferences when the same choice is presented in different forms. An alternative theory of choice is developed, in which value is assigned to gains and losses rather than to final assets and in which probabilities are replaced by decision weights. The value function is normally concave for gains, commonly convex for losses, and is generally steeper for losses than for gains. Decision weights are generally lower than the corresponding probabilities, except in the range of low probabilities. Overweighting of low probabilities may contribute to the attractiveness of both insurance and gambling. KW - choicebehavior KW - economics KW - human KW - risk KW - utility AU - Kahneman, Daniel AU - Tversky, Amos PY - 1979/// UR - http://www.jstor.org/stable/1914185 ER -