Prospect Theory: An Analysis of Decision under Risk — TEI-tagged view

Daniel Kahneman, Amos Tversky · 1979 · psychology · doi:10.2307/1914185 · full text at the source · TEI xml · tagged edition · index · concepts · authors
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sample-size 5 fields · statistical-significance 2 fields · value 2 fields · variance 2 fields
Tags on this paper every tag the record carries, whether or not the words occur in the text below — a number is how many papers in the corpus carry that tag; a tag with no number is unique to this paper
prospect theory2 loss aversion2 reference dependence probability weighting expected utility theory decision weights stated probabilities carriers of value behavioural-experiment117

Our tag layer for this paper

Cross-disciplinary analysis
content-tags & facets: phenomenon · claim-type · cross-domain-transfer · mechanism · claim-relation · replication-status · limitation — grounded in the full text
phenomenondecision making under risk— “The present paper describes several classes of choice problems in which preferences systematically violate the axioms of expected utility theory.”
claim-typemechanism— “The same psychological principle-the overweighting of certainty-favors risk aversion in the domain of gains and risk seeking in the domain of losses.”
method — evidence— “The demonstrations are based on the responses of students and university faculty to hypothetical choice problems.”
transferfrom economics / decision theory: expected-utility theory, the economists' normative model of choice under risk, taken into psychology as the descriptive model to be tested and then replaced— “This paper presents a critique of expected utility theory as a descriptive model of decision making under risk, and develops an alternative model, called prospect theory.”transfers[0]
mechanismA 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— “EXPECTED UTILITY THEORY has dominated the analysis of decision making under risk. It has been generally accepted as a normative model of rational choice [24], and widely applied as a descriptive model of economic behavior, e.g. [15, 4]. Thus, it is assumed that all reasonable people would wish to obey the axioms of the theory [47, 36], and…mechanisms[0]
mechanismAND 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— “The present paper describes several classes of choice problems in which preferences systematically violate the axioms of expected utility theory. In the light of these observations we argue that utility theory, as it is commonly interpreted and applied, is not an adequate descriptive model and we propose an alternative account of choice under…mechanisms[1]
mechanismA 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— “In particular, people underweight outcomes that are merely probable in comparison with outcomes that are obtained with certainty. This tendency, called the certainty effect, contributes to risk aversion in choices involving sure gains and to risk seeking in choices involving sure losses.”mechanisms[2]
mechanismTHE 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— “In addition, people generally discard components that are shared by all prospects under consideration. This tendency, called the isolation effect, leads to inconsistent preferences when the same choice is presented in different forms.”mechanisms[3]
mechanismA 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— “This is a rather puzzling consequence of the risk aversion hypothesis of utility theory, because probabilistic insurance appears intuitively riskier than regular insurance, which entirely eliminates the element of risk. Evidently, the intuitive notion of risk is not adequately captured by the assumed concavity of the utility function for…mechanisms[4]
mechanismTHE 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— “The aversion for probabilistic insurance is particularly intriguing because all insurance is, in a sense, probabilistic. The most avid buyer of insurance remains vulnerable to many financial and other risks which his policies do not cover.”mechanisms[5]
mechanismTHE 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— “Thus, two prospects that are equivalent in probabilities and outcomes could have different values depending on their formulation. Several demonstrations of this general phenomenon are described in the next section.”mechanisms[6]
mechanismTHE 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— “In order to simplify the choice between alternatives, people often disregard components that the alternatives share, and focus on the components that distinguish them (Tversky [44]). This approach to choice problems may produce inconsistent preferences, because a pair of prospects can be decomposed into common and distinctive components in…mechanisms[7]
mechanismTHE 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— “The essential difference between the two representations is in the location of the decision node. In the standard form (Figure 1), the decision maker faces a choice between two risky prospects, whereas in the sequential form (Figure 2) he faces a choice between a risky and a riskless prospect.”mechanisms[8]
mechanismTHE 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— “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.”mechanisms[9]
mechanismWHICH 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— “It is easy to think of decision problems that are most naturally represented in one of the forms above rather than in the other. For example, the choice between two different risky ventures is likely to be viewed in the standard form. On the other hand, the following problem is most likely to be represented in the sequential form.”mechanisms[10]
mechanismTHE 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— “Prospect theory distinguishes two phases in the choice process: an early phase of editing and a subsequent phase of evaluation. The editing phase consists of a preliminary analysis of the offered prospects, which often yields a simpler representation of these prospects. In the second phase, the edited prospects are evaluated and the prospect…mechanisms[11]
mechanismTHE 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— “Gains and losses, of course, are defined relative to some neutral reference point. The reference point usually corresponds to the current asset position, in which case gains and losses coincide with the actual amounts that are received or paid. However, the location of the reference point, and the consequent coding of outcomes as gains or…mechanisms[12]
mechanismAND 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— “Many anomalies of preference result from the editing of prospects. For example, the inconsistencies associated with the isolation effect result from the cancellation of common components. Some intransitivities of choice are explained by a simplification that eliminates small differences between prospects (see Tversky [43]). More generally…mechanisms[13]
contradicts expected utility theory as a descriptive model— “Choices among risky prospects exhibit several pervasive effects that are inconsistent with the basic tenets of utility theory.”claim_relations[0]
contradicts expected utility theory as a descriptive model of choice— “In the light of these observations we argue that utility theory, as it is commonly interpreted and applied, is not an adequate descriptive model and we propose an alternative account of choice under risk.”claim_relations[1]
builds-on Markowitz [29]— “Markowitz [29] was the first to propose that utility be defined on gains and losses rather than on final asset positions, an assumption which has been implicitly accepted in most experimental measurements of utility (see, e.g., [7, 32]).”claim_relations[2]
extends Markowitz [29]— “His treatment, however, retains the expectation principle; hence it cannot account for the many violations of this principle; see, e.g., Table I.”claim_relations[3]
replicates Allais [2]— “This pattern of preferences violates expected utility theory in the manner originally described by Allais.”claim_relations[4]
senseexpected 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— “It has been generally accepted as a normative model of rational choice [24], and widely applied as a descriptive model of economic behavior, e.g. [15, 4]. Thus, it is assumed that all reasonable people would wish to obey the axioms of the theory [47, 36], and that most people actually do, most of the time”senses[0]
senseprospect 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— “The equations of prospect theory retain the general bilinear form that underlies expected utility theory. However, in order to accomodate the effects described in the first part of the paper, we are compelled to assume that values are attached to changes rather than to final states, and that decision weights do not coincide with stated…senses[1]
sensethe 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— “The apparent neglect of a bonus that was common to both options in Problems 11 and 12 implies that the carriers of value or utility are changes of wealth, rather than final asset positions that include current wealth”senses[2]
controlthe same choice problems put to a second population, in Israel, with the pattern of results reported as essentially identical — held — rules out 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— “The pattern of results was essentially identical to the results obtained from Israeli subjects.”controls[0]
differs inprospect theory —contrasted-with→ expected utility theory — values attached to changes rather than final states, and decision weights that do not coincide with stated probabilities— “The equations of prospect theory retain the general bilinear form that underlies expected utility theory. However, in order to accomodate the effects described in the first part of the paper, we are compelled to assume that values are attached to changes rather than to final states, and that decision weights do not coincide with stated…— “However, in order to accomodate the effects described in the first part of the paper, we are compelled to assume that…concept_edges[0]
edgedecision weights —distinct-from→ stated probabilitiesconcept_edges[1]
outcome (stated by the tagger, no quotation)control — heldcontrols[0]
for which uselimitation — the scope of the whole treatment: THE PRESENT DISCUSSION IS RESTRICTED TO PROSPECTS WITH SO-CALLED OBJECTIVE OR STANDARD PROBABILITIES
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limitations[0]
for which uselimitation — 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
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limitations[1]
for which uselimitation — 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
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limitations[2]
for which uselimitation — the insurance-and-gambling account specifically: WE FEEL THAT THE PRESENT ANALYSIS FALLS FAR SHORT OF A FULLY ADEQUATE ACCOUNT OF THESE COMPLEX PHENOMENA
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limitations[3]
for which uselimitation — the task the theory is tested on: THE PRESENT TREATMENT CONCERNS THE SIMPLEST DECISION TASK IN WHICH A PERSON CHOOSES BETWEEN TWO AVAILABLE PROSPECTS
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limitations[4]
for which uselimitation — 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
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limitations[5]
for which uselimitation — 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
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limitations[6]
for which uselimitation — any normative or prescriptive use of prospect theory: the authors state that its
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limitations[7]
for which uselimitation — 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
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limitations[8]
evidence status notemechanism — 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.
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mechanisms[5]
evidence status notemechanism — 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.
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mechanisms[8]
study locationStockholm (city) · wikidata · geonames
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study_location[0]
study locationStanford (city) · wikidata · geonames
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study_location[1]
replicationuntested
limitationthe analysis is restricted to prospects with objective/standard probabilities
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limitations[0]
limitationThe findings rest on hypothetical rather than real choices, which raises validity and generalisability questions the authors acknowledge.
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limitations[1]
limitationThe order in which editing operations are applied, and hence the final edited prospect, is not determined by the theory and is left unstudied.
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limitations[2]
limitationThe theory's account of insurance and gambling is admittedly incomplete.
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limitations[3]
limitationThe treatment covers only the simplest two-prospect choice task, not bidding or other production tasks.
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limitations[4]
limitationHow compound or many-outcome prospects are reduced to simple ones has not been investigated.
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limitations[5]
limitationThe critique is aimed at one of the criticised theory's two stated uses, not at both.
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limitations[6]
limitationThe proposed theory is stated by its own authors to have normatively unacceptable consequences.
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limitations[7]
limitationThe demonstrations rest on a named academic sample and one national currency.
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limitations[8]
Content tags
content-observations: finding · quantity · variable · definition · key-term — grounded in the full text
findingProspect theory critiques expected-utility theory as a descriptive model of decision making under risk; value is assigned to gains and losses rather than to final assets, and probabilities are replaced by decision weights.
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content_tags.findings[0]
not machine-vouchedfinding — declared-ellipsis - An elided quote: its 2 pieces ('This paper presents a critique of expect' ... 'lities are replaced by decision weights.') are each in our copy of the paper, and the quote marks the cut with an ellipsis, so the joined string is in no copy. Located mechanically, piece by piece.content_tags.findings[0]
findingThe 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.
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content_tags.findings[1]
definitionvalue function
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content_tags.definitions[0]
definitiondecision weights
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content_tags.definitions[1]
definitioncertainty effect
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content_tags.definitions[2]
key-termsprospect, utility, value, gains, losses, decision, probabilities, risk, certainty
Concepts
terms this paper carries, each with the sentence it was cut from — the layer that joins one paper to another. Terms with no quote yet are on CONCEPTS.html.
conceptprospect theory
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concepts[0]
conceptexpected utility theory
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concepts[4]
conceptdecision weights
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concepts[5]
conceptstated probabilities
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concepts[6]
conceptcarriers of value
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concepts[7]
Statistics — cross-field join keys
field-invariant statistical terms, used in their statistical sense (gated on a number / symbol / test). A p-value or a standard deviation means the SAME thing in physics, biology, psychology and sociology — so these are the strongest cross-field join keys. Grounded verbatim.
sample-size n/N as written: N =72
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content_tags.statistics[1]
statistical-significance as written: significant
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content_tags.statistics[2]
variance σ²
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content_tags.statistics[3]

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