RSM450H1 Lecture Notes - Lecture 2: European Cooperation In Science And Technology, Forego, Mental Accounting
Document Summary
Prospect theory it is a behavioural economic theory that describes the way people choose between probabilistic alternatives that involve risk, where the probabilities of outcomes are known. The theory states that people make decisions based on the potential value of losses and gains rather than the nal outcome, and that people evaluate these losses and gains using certain heuristics. The model is descriptive: it tries to model real-life choices, rather than optimal decisions, as normative models do. >in psychologically,more accurate description of decision making, compared to the expected utility theory. *heuristics are simple, ef cient rules which people often use to form judgments and make decisions. (mental shortcut) Reference points guide you to evaluating the price in terms of relative gains and losses. e. g retail price > now . 1)losses loom large than gains(almost twice as much). and can lead to loss aversion -people would prefer to avoid looses than gain.
