Clare Walsh L1 Flashcards
What do economists assume about decision-makers?
They are rational
Subjective Expected Utility (SEU)
Making a decision based on the option with the highest expected utility
Subjectivity
The difference is values among different people
K+T
Kahneman and Tversky
Loss aversion
We give losses greater weight than potential gains in making decisions
Certainty Effects K + T
People overweigh outcomes considered certain relative to outcomes which are probable - Kahneman and Tversky
Prospect Theory
A behavioural model showing diminishing marginal value and risk aversion for gains, and reflects risk seeking for losses
In the prospect theory graph, why is the curve for losses steeper?
Because it implies losses have a greater impact on decisions than potential gains
Framing and professionals M
McNeil et al. (1982) - choosing medical treatment
Framing effects
The cognitive biases shown when people make decisions based on how a scenario has been laid out
Certainty Effect
The tendency to feel disproportionately better about outcomes that are certain than those which are probable
On the prospect theory graph, where are gains and losses calculated from?
The point of reference (origin)
What can lead to different judgements on the prospect theory graph?
Shifting the reference point (for example when we buy something)
The endowment effect
Goods become more valuable to you once purchased than before you purchased them
Reasons and decisions - divorce case S
Shafir, 1993 - Easier to Pick B since they have more extreme factors making it easier to give reason for their selection
