Prospect Theory: An Analysis of Decision under Risk

Prospect Theory: An Analysis of Decision under Risk Daniel Kahneman Amos Tversky

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Prospect Theory: An Analysis of Decision under Risk 1979 Econometrica 10.2307/1914185 kahneman-tversky1979-prospect kahneman-tversky1979-prospect.txt, the project's staged copy f73bc243587f758d6a069ad43cc87b68c61c9de9 open-access psychology

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0 spans located by searching the stored text for the quote's exact words, allowing any whitespace between them mechanism Quotation withheld because this record is not cleared for redistribution. decision making under risk Quotation withheld because this record is not cleared for redistribution. behavioural-experiment behavioural-experiment Quotation withheld because this record is not cleared for redistribution. mechanisms A THEORY'S NORMATIVE AND DESCRIPTIVE USES ARE SEPARATED AND ONLY ONE IS ATTACKED: expected utility theory is GENERALLY ACCEPTED AS A NORMATIVE MODEL of rational choice and WIDELY APPLIED AS A DESCRIPTIVE MODEL of economic behaviour - so it is assumed both that all reasonable people WOULD WISH to obey the axioms and that most people ACTUALLY DO. Two different claims travel under one theory's name Quotation withheld because this record is not cleared for redistribution. mechanisms AND THE TARGET IS THE THEORY AS INTERPRETED AND APPLIED, NOT THE FORMALISM: the paper describes classes of problems in which preferences SYSTEMATICALLY VIOLATE the axioms, and concludes that utility theory AS IT IS COMMONLY INTERPRETED AND APPLIED is not an adequate DESCRIPTIVE model. The qualifier is doing the work - what fails is a use of the theory Quotation withheld because this record is not cleared for redistribution. mechanisms A PHENOMENON IS NAMED AT THE MOMENT IT IS INTRODUCED, AND THE NAME CARRIES THE MECHANISM: people underweight outcomes that are MERELY PROBABLE compared with outcomes obtained with CERTAINTY, and THIS TENDENCY, CALLED THE CERTAINTY EFFECT, is what contributes to risk aversion for sure gains and risk seeking for sure losses Quotation withheld because this record is not cleared for redistribution. mechanisms THE SECOND NAMED TENDENCY IS EXPLICITLY A FACT ABOUT DESCRIPTION: people DISCARD COMPONENTS SHARED BY ALL PROSPECTS under consideration, and THIS TENDENCY, CALLED THE ISOLATION EFFECT, LEADS TO INCONSISTENT PREFERENCES WHEN THE SAME CHOICE IS PRESENTED IN DIFFERENT FORMS. The inconsistency is produced by the form, not by the choice Quotation withheld because this record is not cleared for redistribution. mechanisms A FORMAL OPERATIONALISATION IS REPORTED AS FAILING TO CAPTURE THE INTUITIVE NOTION IT STANDS FOR: the aversion to probabilistic insurance is called A RATHER PUZZLING CONSEQUENCE of the risk aversion hypothesis, and the conclusion drawn is that THE INTUITIVE NOTION OF RISK IS NOT ADEQUATELY CAPTURED BY THE ASSUMED CONCAVITY of the utility function for wealth. The formalism and the word have come apart, and the paper says which is at fault Quotation withheld because this record is not cleared for redistribution. mechanisms THE CONTRAST CLASS IS DISSOLVED INTO A MATTER OF DEGREE BEFORE ANY NEW TERM IS OFFERED: the aversion to probabilistic insurance is called PARTICULARLY INTRIGUING because ALL INSURANCE IS, IN A SENSE, PROBABILISTIC - even the most avid buyer REMAINS VULNERABLE to many risks his policies do not cover. What looked like two kinds of thing is shown to be one kind at two settings about this quote: The sentence coining 'contingent insurance' is UNQUOTABLE from this file: a running head and page number are spliced into it - "which provides the certainty of coverage for a PROSPECT THEORY 271 specified type of risk". Damage shape 1. The tag was rewritten to stand on the span it has. Quotation withheld because this record is not cleared for redistribution. mechanisms THE THESIS IS STATED IN ONE SENTENCE AND THE DEMONSTRATIONS ARE PROMISED: two prospects that are EQUIVALENT IN PROBABILITIES AND OUTCOMES COULD HAVE DIFFERENT VALUES DEPENDING ON THEIR FORMULATION. Everything else in the section is evidence for that one claim about description Quotation withheld because this record is not cleared for redistribution. mechanisms THE MECHANISM IS THAT ONE OBJECT ADMITS MORE THAN ONE DECOMPOSITION: to simplify a choice people disregard components the alternatives SHARE and focus on those that DISTINGUISH them - which may produce inconsistent preferences BECAUSE A PAIR OF PROSPECTS CAN BE DECOMPOSED INTO COMMON AND DISTINCTIVE COMPONENTS IN MORE THAN ONE WAY, and different decompositions sometimes lead to different preferences Quotation withheld because this record is not cleared for redistribution. mechanisms THE DIFFERENCE BETWEEN TWO FORMULATIONS IS LOCATED IN THE REPRESENTATION ITSELF: the ESSENTIAL DIFFERENCE between the two decision trees is IN THE LOCATION OF THE DECISION NODE - in the standard form the decision maker faces a choice between two RISKY prospects, and in the sequential form between a RISKY AND A RISKLESS one. The same underlying gamble, two diagrams, and the contrast that drives the effect is a feature of the diagram about this quote: EXTENDED as far as the file allows, then the tag trimmed. The clause "without changing either probabilities or outcomes" is broken across a page boundary by a running head and a figure - "either probabilities or 272 D. KAHNEMAN AND A. TVERSKY 4/_ 4000 ... outcomes" - so it cannot be quoted verbatim and is not claimed. Quotation withheld because this record is not cleared for redistribution. mechanisms THE EFFECT IS PRESENTED AS FALSIFYING A FOUNDATIONAL SUPPOSITION RATHER THAN AS A CURIOSITY: the reversal of preferences due to the dependency among events is PARTICULARLY SIGNIFICANT BECAUSE IT VIOLATES THE BASIC SUPPOSITION of a decision-theoretical analysis, THAT CHOICES BETWEEN PROSPECTS ARE DETERMINED SOLELY BY THE PROBABILITIES OF FINAL STATES Quotation withheld because this record is not cleared for redistribution. mechanisms WHICH REPRESENTATION IS NATURAL IS ITSELF A PROPERTY OF THE PROBLEM, NOT A FREE CHOICE: it is EASY TO THINK OF decision problems MOST NATURALLY REPRESENTED in one of the forms rather than the other - a choice between two risky ventures is likely to be viewed in the standard form, and the paper then gives a problem that is MOST LIKELY TO BE REPRESENTED in the sequential form Quotation withheld because this record is not cleared for redistribution. mechanisms THE THEORY PUTS A RE-DESCRIPTION STEP BEFORE THE EVALUATION STEP AND MODELS IT SEPARATELY: two phases are distinguished, an early phase of EDITING and a subsequent phase of EVALUATION, and the function of the editing phase is TO ORGANIZE AND REFORMULATE THE OPTIONS so as to simplify subsequent choice. A formal theory of how a problem is restated before it is answered Quotation withheld because this record is not cleared for redistribution. mechanisms THE REFERENCE POINT THAT DECIDES WHAT COUNTS AS A GAIN IS ITSELF SET BY THE FORMULATION: gains and losses are DEFINED RELATIVE TO SOME NEUTRAL REFERENCE POINT, usually the current asset position - but THE LOCATION OF THE REFERENCE POINT, AND THE CONSEQUENT CODING OF OUTCOMES AS GAINS OR LOSSES, CAN BE AFFECTED BY THE FORMULATION of the offered prospects and by the decision maker's expectations Quotation withheld because this record is not cleared for redistribution. mechanisms AND THE CONCLUSION IS STATED AS A PROPERTY OF PREFERENCE ORDERS: MANY ANOMALIES OF PREFERENCE RESULT FROM THE EDITING OF PROSPECTS, and MORE GENERALLY THE PREFERENCE ORDER BETWEEN PROSPECTS NEED NOT BE INVARIANT ACROSS CONTEXTS, BECAUSE THE SAME OFFERED PROSPECT COULD BE EDITED IN DIFFERENT WAYS DEPENDING ON THE CONTEXT IN WHICH IT APPEARS. The order is a property of the description as much as of the object Quotation withheld because this record is not cleared for redistribution. the analysis is restricted to prospects with objective/standard probabilities what this limits: the scope of the whole treatment: THE PRESENT DISCUSSION IS RESTRICTED TO PROSPECTS WITH SO-CALLED OBJECTIVE OR STANDARD PROBABILITIES Quotation withheld because this record is not cleared for redistribution. The findings rest on hypothetical rather than real choices, which raises validity and generalisability questions the authors acknowledge. what this limits: every empirical result in the paper: THE RELIANCE ON HYPOTHETICAL CHOICES RAISES OBVIOUS QUESTIONS REGARDING THE VALIDITY OF THE METHOD AND THE GENERALIZABILITY OF THE RESULTS Quotation withheld because this record is not cleared for redistribution. The order in which editing operations are applied, and hence the final edited prospect, is not determined by the theory and is left unstudied. what this limits: the determinacy of the model's own predictions: the order of editing operations decides the final edited prospect, and A DETAILED STUDY OF THIS PROBLEM IS BEYOND THE SCOPE OF THE PRESENT TREATMENT Quotation withheld because this record is not cleared for redistribution. The theory's account of insurance and gambling is admittedly incomplete. what this limits: the insurance-and-gambling account specifically: WE FEEL THAT THE PRESENT ANALYSIS FALLS FAR SHORT OF A FULLY ADEQUATE ACCOUNT OF THESE COMPLEX PHENOMENA Quotation withheld because this record is not cleared for redistribution. The treatment covers only the simplest two-prospect choice task, not bidding or other production tasks. what this limits: the task the theory is tested on: THE PRESENT TREATMENT CONCERNS THE SIMPLEST DECISION TASK IN WHICH A PERSON CHOOSES BETWEEN TWO AVAILABLE PROSPECTS Quotation withheld because this record is not cleared for redistribution. How compound or many-outcome prospects are reduced to simple ones has not been investigated. what this limits: any application to compound prospects: THE MANNER IN WHICH COMPLEX OPTIONS, E.G., COMPOUND PROSPECTS, ARE REDUCED TO SIMPLER ONES IS YET TO BE INVESTIGATED Quotation withheld because this record is not cleared for redistribution. The critique is aimed at one of the criticised theory's two stated uses, not at both. what this limits: any claim that this paper refutes expected utility theory: the authors state it is accepted as a normative model of rational choice and separately applied as a descriptive model of economic behavior, and the critique is of the descriptive use Quotation withheld because this record is not cleared for redistribution. The proposed theory is stated by its own authors to have normatively unacceptable consequences. what this limits: any normative or prescriptive use of prospect theory: the authors state that its Quotation withheld because this record is not cleared for redistribution. The demonstrations rest on a named academic sample and one national currency. what this limits: any generalisation of these effects to a population: the demonstrations are based on the responses of students and university faculty to hypothetical choice problems, with outcomes denominated in Israeli currency Quotation withheld because this record is not cleared for redistribution. expected-utility theory, the economists' normative model of choice under risk, taken into psychology as the descriptive model to be tested and then replaced Quotation withheld because this record is not cleared for redistribution. the same choice problems put to a second population, in Israel, with the pattern of results reported as essentially identical eliminates: the violations of expected utility being a property of one student population or one currency - the same gambles put to a different country produce the same reversals · outcome (stated by the tagger, no quotation): held Quotation withheld because this record is not cleared for redistribution. prospect theory prospect theory Quotation withheld because this record is not cleared for redistribution. expected utility theory expected utility theory Quotation withheld because this record is not cleared for redistribution. decision weights decision weights Quotation withheld because this record is not cleared for redistribution. stated probabilities stated probabilities Quotation withheld because this record is not cleared for redistribution. carriers of value carriers of value Quotation withheld because this record is not cleared for redistribution. expected utility theory - TWO USES UNDER ONE NAME, NAMED IN ONE SENTENCE: accepted as a NORMATIVE model of rational choice - what reasonable people would WISH to do - and applied as a DESCRIPTIVE model of economic behavior - what most people ACTUALLY DO; the paper's critique is of the second use only, and the distinction is carried by those two verbs Quotation withheld because this record is not cleared for redistribution. prospect theory - DESCRIPTIVE, AND SAID BY ITS AUTHORS TO FAIL AS A NORM: it keeps the bilinear form of expected utility theory but attaches values to changes and lets decision weights depart from stated probabilities, and the authors state these departures must lead to normatively unacceptable consequences Quotation withheld because this record is not cleared for redistribution. the carriers of value - CHANGES OF WEALTH, NOT FINAL ASSET POSITIONS: the cornerstone of the theory is that value attaches to changes rather than to states that include current wealth, so every quantity in the model is defined relative to a reference point that the model itself does not fix Quotation withheld because this record is not cleared for redistribution. contradicts → expected utility theory as a descriptive model Quotation withheld because this record is not cleared for redistribution. contradicts → expected utility theory as a descriptive model of choice Quotation withheld because this record is not cleared for redistribution. builds-on → Markowitz [29] Quotation withheld because this record is not cleared for redistribution. extends → Markowitz [29] Quotation withheld because this record is not cleared for redistribution. replicates → Allais [2] Quotation withheld because this record is not cleared for redistribution. prospect theory —contrasted-with→ expected utility theory prospect theory expected utility theory differs in: values attached to changes rather than final states, and decision weights that do not coincide with stated probabilities · strength of the relation: 1 Quotation withheld because this record is not cleared for redistribution. decision weights —distinct-from→ stated probabilities decision weights stated probabilities strength of the relation: 1 Quotation withheld because this record is not cleared for redistribution. The value function is normally concave for gains, commonly convex for losses, and generally steeper for losses than for gains; overweighting of low probabilities may contribute to the attractiveness of both insurance and gambling. Quotation withheld because this record is not cleared for redistribution. value function value function Quotation withheld because this record is not cleared for redistribution. decision weights decision weights Quotation withheld because this record is not cleared for redistribution. certainty effect certainty effect Quotation withheld because this record is not cleared for redistribution. sample-size sample-size Quotation withheld because this record is not cleared for redistribution. statistical-significance statistical-significance Quotation withheld because this record is not cleared for redistribution. variance variance Quotation withheld because this record is not cleared for redistribution.

The full text of this article is not redistributable, so it is not included here. The evidence sentences are withheld with it; the tag layer and its grounding status remain. The article itself is at https://doi.org/10.2307/1914185.