prospect theory and decision framing

what is decision framing

internal representation of a problem inside the head of the decision maker

what is prospect theory definition

a descriptive, behavioural economic theory that describes the way people choose between risky alternatives where probabilities of outcomes are known (Kahneman & Tversky, 1979, 1992)

what is loss aversion

people’s tendency to strongly prefer avoiding losses to acquiring equivalent gains - studies suggest losses are 2x as powerful as gains

what is the positive frame for the disease problem

A. 200 saved, B. 1/3 chance 600 saved, 2/3 chance none saved

what is the negative frame of the disease problem

A. 400 people die, B. 1/3 chance nobody dies, 2/3 chance 600 die

explain the results of the disease problem

people are risk seeking in losses, but risk averse in gains

real business example of framing

bank - 1. branch based strategy (safe option), 2. internet banking (risky option) - choices were framed positively or negatively = experienced bankers were risk averse in gains and risk seeking in losses

what is the invariance axiom

states different representations of same choice problem should yield the same preference.

Kahneman quote

‘the emotional tail wags the rational dog’