Chapter 10 Econ Behav
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1
Loss Aversion
The bad of losses outweighs
the good of gains
the good of gains
2
Prospect Theory
amends Expected Utility Theory by introducing
• Loss Aversion
• Reference-dependent utility (value functions)
• Subjective probabilities
• Loss Aversion
• Reference-dependent utility (value functions)
• Subjective probabilities
3
We have decreasing marginal utility of moneyoods/etc. when it’s framed as
gains
4
We have decreasing marginal disutility of losses, which means increasing marginal utility of increasing moneyoods/etc. when it’s framed as
avoided losses
5
Integrating
means you evaluate the net change rather than each change individually. Reference point has not moved.
ex: Winning $10 then losing $5 would be evaluated as a net gain of $5 [v(+$5)]
THE MOST FAVORABLE WILL MAKE YOU HAPPIER!!!
ex: Winning $10 then losing $5 would be evaluated as a net gain of $5 [v(+$5)]
THE MOST FAVORABLE WILL MAKE YOU HAPPIER!!!
6
Segregating
means you evaluate each change rather than combining them. Reference point has moved.
ex: Winning $10 then losing $5 would be evaluated as v($10) + v(-$5)
ex: Winning $10 then losing $5 would be evaluated as v($10) + v(-$5)
7
certainty effect
Tendency to put relatively more value
(positive or negative) on certain outcomes
than EUT would predict
(positive or negative) on certain outcomes
than EUT would predict
8
probability weighting function (or
subjective probability function)
subjective probability function)
transforms
actual probabilities into subjective probabilities
actual probabilities into subjective probabilities
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