Prospect Theory: Difference between revisions
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25% chance of winning $3,000 and 20% chance of winning $4,000 | 25% chance of winning $3,000 and 20% chance of winning $4,000 | ||
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Revision as of 17:38, 4 May 2006
Prospect Theory is a mathematically-formulated alternative to the theory of expected utility maximization.
Expected Utility theory is based on rational behavior of agents and yet has "systematically mispredicted human behavior in at least certain circumstances." (Schiller, 1997)
For instance, Kahneman and Tversky's (1979) lottery experiment.
25% chance of winning $3,000 and 20% chance of winning $4,000
and 65% chose latter
But
100% chance of winning $3,000 and 80% chance of winning $4,000
80% chose former
Prospect Theory similar to Expected Utility Theory in that
Thus, model used zeroing and "one-ing"
