THE PROSPECT THEORY
Two Israeli psychologists called Daniel Kahneman and Amos Tversky worked out on what iscalled
the Prospectus Theory, which is a model aimed to describe accurately the actual choices of
individuals in their lives. This theory is not in conflict with the waited Utilitiestheory, which
provides a model for the way people should behave in order to make the best decision possible,
but is aimed to supplement and specify it.
The Theory of the Prospectus and is a model which describes the real processes of decision
making, starting from the observation of the behaviour of the choice. It addresses the person to
take the optimal decision.
With the prospect term we want to indicate that we commonly call the lottery, but in this case you
want to emphasize the subjective character that alternatives take in the minds of individuals or of
the decision maker.
Important is the internal division of the Prospectus Theory where we have two phases of the
selection process: on one hand the phase called editing and on the other the assessment phase.
The editing phase is simply an initial analysis of alternatives, which allows us to have a simplified
view of the situation or information. This preliminary analysis is performed unconsciously, and
uses a series of mental simplification operations, such as encryption, combination, separation,
deletion, simplification and recognition of dominance.
Whereas in the evaluation phase all simplified versions that emerged from the previous phase, i.e.
editing, are compared and evaluated; so that the one with the highest value is chosen.
The latter focuses on two functions that individuals can use to assess the chances and they are:
the weighting function and the value function. Paying attention on the first function we can say
that this highlights two very important aspects and closely related to the subjective perception of
probabilities. When the odds are lower then there is a tendency to over-estimate. In contrast,
when these are medium and high are undervalued.
The balance of probabilities shows that the value of an option is not multiplied by the probability
of the option itself, but for its impact on the decision. It is in fact explained the certainty effect.
For examples it asked for a sample of 95 subjects to choose from the options of each of the
following problems.
• Problem 1: choose between:
A: a sure win of $ 30
A ': 80% chance to win $ 45
• Problem 2: choose between:
B: a winning of $ 30 with 25% probability
B ': a winning of $ 45 with 20% probability
The two researchers observed that there was a tendency to an inconsistent choice for both
problems. The 80% of the sample chose option A in problem 1, while 65% chose the B 'option in
issue 2. In the first, the majority of subjects chose the safe outcome (despite the expected value of
the latter it was lower than the other alternative); in the second case the majority of the sample
chose the outcome with greater expected value (but with lower probability of occurrence). This
means that, the chance of a certain outcome has a greater impact when the outcome is initially
certain, than when it is only probable.
About the function of the value while, the outcomes are evaluated by considering a point and
subsequently in the separate category of winnings or losses. Both for the winnings that for the
losses there are changes that lead losses to be more steep than the winnings and vice versa. At the
base of the value function there are a number of irrational behaviour, such as: loss aversion, the
reference point, the framing effect and the status quo bias.
REFERENCES
https://lituopadania.wordpress.com/2011/04/02/leffetto-framing-di-tversky-e-kahneman-ilproblema-della-malattia-asiatica/
https://it.wikipedia.org/wiki/Teoria_del_prospetto
http://homepage.sns.it/hosni/lori/readings/andrea-prospect-theory-2.pdf