ECON 310 Lecture Notes - Lecture 3: Prospect Theory, Loss Aversion, Daniel Kahneman
30 Jan 2019
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In a study, psychologists have found that olympic bronze medalists look on average happier than silver medalists. When we respond to attributes such as brightness, loudness, or temperature, the past and present context of experience defines an adaptation level, or reference point, and stimuli are perceived in relation to this reference point. It is in our nature to perceive things in comparison, and not only in their absolute nature. Comparative judgments come much more easily than absolute judgments. Ex: evaluating 2 buckets of water separately versus in comparison. Much the same is true for evaluations of economic outcomes utility. Reference-dependent utility or reference-dependent preferences look at the extent and nature of such relative evaluations in utility. Most economic decisions involve at least some element of risk. A risky situation can be characterized by a list of possible outcomes and their probabilities. Can break decision-making under risk into two elements: utilities from outcomes.
