Prospect Theory

Avoiding Uncertainty: a common response
       
Reward results and punish failure

Cut research & training during budget crises

$140,000 to prevent a highway death; 
$5,000,000 to prevent a death from radiation
A Normative Background to Risk:

probability, expected value, risk considerations
The Framing of Information

4 plants, 6000 jobs are at risk:
save one plant, 2000 jobs, 
or 50% chance of saving 3 plants, 6000 jobs
50% chance of saving none 
lose 2 plants, 4000 jobs, 
or 50% chance of losing none
50% chance of loing all 3 plantsm 6000 jobs 
p.49 "rational decision makers should be immune to the framing of choices."
The Framing of Risky Decision

Gains versus Losses ("The Framing of Choices")
Choose 1 row from left column, 1 row from right column
(A1) A sure gain of $240 (B1) A sure loss of $750
(A2) 25% chance of $1000 gain,
75% gain nothing
(B2) 75% chance to lose $1000, 
25% lose nothing
Choose 1 row:
(C1) 25% chance of a $240 gain, 75% chance of $760 loss
(C2) 25% chance of a $250 gain, 75% chance of $750 loss
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Anchors Matter

Lose the tickets on the way to the theater: do you buy new ones at the door?
Lose the cash you were going to use to buy tickets at the door; do you charge the tickets?
Certainty Effect 

Choose one row from each column
(D1) Winning $50 with probability .5 
(D2) Winning $30 with probability .7 
(E1) Winning $50 with probability .8 
(E2)  Winning $30 with probability 1.0 
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Pseudocertainty:

problem 4: choose between $30 for sure or an 80% chance at $45, 20% of zero
problem 5: 75% chance of being out of the gam in round 1; 
if you win round 1, choose between $30 for sure or an 80% chance at $45, 20% of zero
problem 6: choose between 25% chance at $30 & 75% of zero
or a 20% chance of $45 80% of zero
Problems 5 & 6 are mathematically indentical
"Insurance Premiums:" Sound Better Than "Guaranteed Loss"
Transactional Utility ("What's It Worth to You?")

  friend brings you a bottle of beer from fancy resort or rundown grocery
How Much is Your Time Worth?

  20 minutes to get something for $25 instead of 50
20 minutes ot get something for $475 instead of $500
The Value We Place on What We Own 

Historical cost, replacement cost, and real utility