Lecture 5 Flashcards
prospect theory
Three principles of outcome value:
1. principle of diminishing sensitivity
- as value increases, the perceived increase of value decreases (diminishing marginal returns)
2. relativity principle
- evaluation is relative to a neutral reference point
3. principle of loss aversion
- losses loom larger than gains
expected value theory
peple should choose the option with the highest expected value (EV). but does not always happen
expected utility theory
objective value, subjective value.
it just depends on a person.
a 100 euros is matched with certain utility points, 40 euros as well. and then just look how many points the gambles get. Its about maximizing expected utility.
Diminishing marginal returns
The law of diminishing marginal returns states that after an optimal amount of capacity increasing the inputs results in a decreased amount of outputs. In other words, after a critical point of increase, the outputs start to decrease for every unit of input invested in a production system. Although additional input after the optimum level decreases the output, the law does not imply this directly.
It’s definitely an implication for achievement and motivation.
Bernoulli’s error
the utility of having a certain monetary amount is associated with a certain level of happiness. no. –> relativity principle
- evaluation is relative to a neutral reference point
endowment effect
We attach more value to the things we already own
Relatvity principle
- evaluation is relative to a neutral reference point
- forfeiture (losing something) vs acquisition choice (gaining)
person who got residence hall b instead of her first choice, after two months, she would still pay money to go to residence hall a, but she would pay less, because you attach more value to the things we already own
principle of loss aversion
- losses loom larger than gains- we attach more value to the things we already own, because we dont wanna lose what we already have, especially after longer ownership and physical possesion
How can be the diminishing marginal returns also be applied to the principe of loss aversion?
when people already lost a lot, they don’t give a shit anymore what they’re going to lose.
what does the prospect theory actually look like then?
like an s. bottom left the losses, where the more losses you have, the more it doesn’t matter. you get to that reference point. And then top right you see the gains, that will also lead to a reference point.
possibility effect
Very low chances are overestimated:
- for gains people become from risk seeking
- for losses, people become risk averse
certainty effect
underestimation of large probabilities
Why do people choose to amble when under economic threat?
because they feel like the traditional way doesn’t work. that is why they start gambling.
Need to make money in different ways.
but negative affect: escape their negative mood.
(think about the study with the people who read this newspaper about the financial fall of the students and the control condition who did not)
