1Loss Aversion
The bad of losses outweighs
the good of gains
2Prospect Theory
amends Expected Utility Theory by introducing
• Loss Aversion
• Reference-dependent utility (value functions)
• Subjective probabilities
3We have decreasing marginal utility of moneyoods/etc. when it’s framed as
gains
4We have decreasing marginal disutility of losses, which means increasing marginal utility of increasing moneyoods/etc. when it’s framed as
avoided losses
5Integrating
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)]
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6Segregating
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)
7certainty effect
Tendency to put relatively more value
(positive or negative) on certain outcomes
than EUT would predict
8probability weighting function (or
subjective probability function)
transforms
actual probabilities into subjective probabilities