Prospect theory

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    There is this theory that describes how we tend to make our decisions: Prospect Theory! Kahneman and Tversky developed this in order to describe the way that people choose between “probabilistic alternatives that involve risk, where possibilities are known.” This means that people tend to make decisions based on the pros and cons rather than the final outcome, and that people weigh these pros and cons using heuristics. ("Prospect Theory." Wikipedia. Wikimedia Foundation, n.d. Web. 17 Oct. 2015.) Prospect theory relates to the three models of decision making as read in my textbook in that it all essentially talks about weighing some pros and cons of the decisions being made. The theory relates to the “Single-Feature Model” because with this…

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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%…

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    Prospect Theory

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    recent years. According to prospect theory, even though the investor is presented with the same mutual fund, he or she is more likely to buy the mutual fund from the first advisor, who expressed the rate of return as an overall 7% gain, rather a combination of both high returns and losses. Prospect theory is based on the following five main ideas which is reference dependence, declining sensitivity, loss aversion, non-linear weighting of probabilities and susceptibility to framing effects.…

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    Before the theories of behavioral economics, economics was a generally straightforward field. Adding this new approach to consumer behavior makes us seem less like robots acting only as economics expects us to act and more like the more or less irrational beings we are. As Swiss economist, Bruno Frey put it, “The agent of economic theory is rational, selfish, and his tastes do not change.” The Homo Economicus, whom psychologist Daniel Kahneman refers to as “Econs” focuses on rationality to…

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    Summary: Simulation

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    Overall, going into this simulation, I came up with three general strategies I was going to follow. The first and most obvious was trying to maximize New Heritage Doll firm’s value by selecting some of the most attractive projects based off NPV, IRR, and PI. However, I also aimed to make appropriate selections based on diversifying among the three departments (retailing, licensing, and production) along with diversifying among riskiness for each year. For each year, I was given $8 million…

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    Cumulative prospect theory ( cpt) Introduction Cumulative prospect theory (CPT) is a model for descriptive decisions under risk and crisis which was introduced by Amos Tversky and Daniel Kahneman in 1992 (Tversky, Kahneman, 1992). It is a further development and variant of prospect theory. The difference between this version and the original version of prospect theory is that weighting is applied to the cumulative probability distribution function, as in rank-dependent expected utility theory…

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    participate in the financial market. This phenomenon gives a shock to rational assumptions related to the traditional economic theory. For figuring out the principles and motivations behind decision-making process, behavioral economics has been widely discussed more than ever. Endowment effect, as one of economic phenomenon, arises from economic activities affecting preference and value construction (Ariely and Norton, 2008; Willemsen et al.2011). This essay explains what the endowment effect is…

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    2. Knowledge about variation 3. Theory of knowledge 4. Psychology The rest of the paper is organized in the following way: Section 2 provides information on Prospect Theory and System of Profound Knowledge. Section 3 discusses how “Is Tiger Woods Loss Averse? Persistent Bias in the Face of Experience, Competition, and High Stakes” exhibits Profound Knowledge. Section 4 confers to the learning from analysis and in section 5 end the paper with the conclusion. 2.1. Prospect Theory Prospect theory…

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    Park Slope Case Study

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    Park Slope is neighborhood in Brooklyn that has become know as “highly desirable.” Park Slope is known for its historic buildings, shops that line Fifth and Seventh Avenues, bars and its proximity to Prospect Park. Around the 60’s and 70’s many of Park Slopes historic brownstones were cleaned up along with the rest of the neighborhood but before this Park Slope was a rough working-class neighborhood. Many neighborhoods, including Park Slope, are going through the process of gentrification. While…

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    The Framing Effect

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    study regarding the Asian disease problem, they found that Individuals tend to choose a less risky option, or be more risk-averse, when the course of action is presented positively (gain), and tend to choose a more risky option, be more risk-seeking, when the course of action is presented negatively (loss). In other words, framing the outcome of a decision problem differently shifts a decision maker’s choice from risk-averse to risk-seeking. However, one limitation is that they failed to…

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