Kahneman And Tversky's Prospect Theory

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Kahneman and Tversky developed the Prospect Theory to describe how people choose different choices that involve risk, knowing the probable outcomes. This demonstrates the way a person feels toward taking risks that involve positive outcomes is very different from the way a person feels toward risks that involve a negative outcome. The decision a person makes reflects on their judgement which can be heavy considering the conditions of uncertainty. For example, if people had a choice of: a) 100% chance receiving $2,000, or b) Having an 80% chance of receiving $3,000 and 20% receiving nothing, more than seventy-five percent of people would choose choice “b”. In reverse to that, if a person had a choice of: c) 100% chance of losing $2,000, or d) …show more content…
In the single-feature model, a person bases their decision on a single characteristic. Its often a good method with a minor choice and wont make much of a difference. For example, if a person were at a store looking at all the choices of dog food, they may make their choice by just choosing the cheapest one. When there is a more at risk decision, the characteristic on one single item can increase the riskiness of their decision. With the additive model, its a better option to use for complex decision. A person creates a list of factors that are important to them, then goes back through and rates each factor on a scale of importance, such as 0 to 5. If one is extremely important to them, they rate it a 5. If one is not so important as the rest, they may rate it a 0 or 1. This strategy often helps point out the overall best choice for them by comparing the alternatives. Lastly with the elimination by aspects model, it involves looking at all the choices one feature at a time, starting with which is more important to them. If one choice fails to meet their criteria, they immediately mark it off the list of possible decisions. As their choices are narrowed down one at a time, they discover which is the best decision for them and what they want. All of these models relate to the Prospect Theory given that the way they decide determines on how much of an importance a decision it is to them and the amount of risks. This year i have to make a decision about what college i want to attend next school year. I have the options of Murray State University, Western Kentucky University, and Madisonville Community College which i am able to take at a local campus a few miles down the road. Using the single-feature method, i would

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