Prospect theory, loss aversion, anchoring, framing, nudges, and bounded rationality.
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- What does prospect theory propose about how people make decisions?
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People evaluate outcomes relative to a reference point and are risk-averse for gains but risk-seeking for losses.- Who developed prospect theory?
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Daniel Kahneman and Amos Tversky in 1979.- What is a reference point in prospect theory?
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The baseline or status quo from which potential outcomes are evaluated as gains or losses.- Describe the shape of the value function for gains in prospect theory.
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Concave, showing diminishing sensitivity as gains increase.- Describe the shape of the value function for losses in prospect theory.
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Convex, showing diminishing sensitivity as losses increase in magnitude.- What is probability weighting in prospect theory?
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People distort probabilities, overweighting small probabilities and underweighting large ones.- Define loss aversion.
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The tendency to strongly prefer avoiding losses over acquiring equivalent gains.- What is the typical magnitude of loss aversion?
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People feel losses approximately 2 to 3 times more strongly than equivalent gains.- What is the endowment effect?
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People assign more value to an item they own than to the same item when they do not own it.- What is status quo bias?
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A preference for the current state of affairs, even when alternatives might be objectively better.- What is the sunk cost fallacy?
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The tendency to continue investing resources in a project because resources have already been spent, regardless of future prospects.- Define the anchoring effect.
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A cognitive bias where the first piece of information offered becomes a reference point that influences subsequent judgments.- Explain the anchoring-and-adjustment heuristic.
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People start from an initial anchor value and make adjustments from it to reach their final estimate, often adjusting insufficiently.- Why are people susceptible to numeric anchoring?
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Numbers presented early in a decision become reference points that unconsciously constrain the range of judgments considered.- What is social anchoring?
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When people adjust their judgments based on the opinions or positions of others presented first.
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