PSYCH 4508 Lecture Notes - Lecture 5: Ambiguity Aversion, Richard Thaler, Prospect Theory
12 Sep 2016
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Document Summary
The standard-gamble method for estimating utilities assumes that all of the. Our choices are determined primarily by the shape of the utility function. The shape of our utility function can be inferred from our choices. This is the standard seu approach: the method assumes that none of the action is in the probabilities. This is, we treat probabilities just like we are supposed to. Prospect theory (pt) relaxes this assumption, which makes it a much better descriptive theory than seu. Prospect theory"s value function (editing stage: values judged relative to a reference point . Sometimes a break-even point, an aspiration level, or other salient point. This is a very meaningful departure from ev and seu. People may adapt to a new reference point quickly. Prospect theory"s value function (evaluation stage: diminishing marginal sensitivity to changes from the reference point (gains and losses satiate) The reflection effect : steeper slope for losses than for gains.
