Prospect Theory in Brain Flashcards
What should rational decisions follow?
Independence axiom of preference of expected utility theory
What does the Allais paradox show?
Independence axiom of expected utility theory not always obeyed - inconsistency of choices
What does prospect theory suggest?
Make decisions based on potential value of losses and gains - not on final outcome
Name the 2 key aspects of prospect theory
Reference dependency
Loss aversion
What is reference dependency?
Decide which outcomes equivalent - reference point
Lesser outcomes considered losses
Greater outcomes considered gains
What is loss aversion?
Pleasure from small gain less important than displeasure from losing same amount
Loss usually has double weighting of gain
Irrational
What is the effect of a gain frame?
Less likely to gamble - increased risk aversion
What is the effect of a loss frame?
More likely to gamble - decreased risk aversion
Does the framing effect support or weaken prospect theory?
Support
Why is the framing effect not due to confusion?
Reaction times similar in gain and loss frames
Why is the framing effect not due to cognitive limitations?
Decision-making task whilst performing distracting task - increases cognitive load
Still same relative levels of chance of gamble in different frames
Why is the framing effect not due to people acting stupidly because it involves small amounts of money?
At all initial amounts still higher chance of gambling in loss frame
When is there bilateral amygdala activation during the decision-making process?
When decision made in accordance with frame effect
