Wednesday, April 25, 2012

Prospect Theory - based on the way a problem is framed ( make X amount vs I will loose X amount), different outcomes are chosen.

Since people are loss averse, a loss the same size as a gain has a much greater affect (Prospect Theory).  Also the prospect of a small loss vs a large gain is undesirable (myopic loss aversion).  So if presented an opportunity that was favorable, it would not be taken because of this (Equity premium puzzle - stocks have outperformed bonds but standard economic theory says that .  However framing the question differently may lead to taking that risk (ie: thinking in another language led to better results because less emotional bias was used in deliberation)

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