Prospect Theory


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Prospect Theory

A theory stating that investors are more likely to make an investment if it is advertised in terms of growth rather than loss. That is, an advertiser is more likely to be successful if he argues that an investment will probably return 10% than if he argues that it might lose 100%. Prospect theory is a fairly obvious concept, but it important to remember when making recommendations. See also: Behavioral Economics.
References in periodicals archive ?
"There is a powerful psychological theory called 'prospect theory' which shows that when one is decision-making under uncertainty - which we are in an independence referendum since no one can be sure about the consequences - then the way things are framed is critical.
Prospect theory, the behavioral-economics model pioneered by Nobel laureates Daniel Kahneman and Amos Tversky, predicts that people will become less risk-averse if presented with only bad options.
Prospect theory, the behavioural-economics model pioneered by Nobel laureates Daniel Kahneman and Amos Tversky, predicts that people will become less risk-averse if presented with only bad options.
One of their theories is "prospect theory", which states that "the pain of losing is 2 times greater than the pleasure of winning".
This is a fundamental principle in Behavioral Economics that was discussed in Prospect Theory, the seminal study of Nobel Prize winner Daniel Kahneman and the late Amos Trevsky.
In "Prospect Theory: An Analysis of Decision Under Risk," Daniel Kahneman and Amos Tversky showed that people often use rules of thumb rather than optimizing, rational calculus.
"Such changing trends could be interpreted from the perspective of 'prospect theory'," said Psaltis.
Cumulative Prospect Theory (CPT), introduced by Tversky and Kahneman (1992), has become one of the most prominent behavioral theories in finance, especially as a behavioral counterpart to Expected Utility Theory (EUT).
Kahneman and Tversky's "(https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1505880) prospect theory " is based upon a simple notion: Under conditions of uncertainty, people weigh loss much more than gain when making assessments about the future.
According to the prospect theory, some psychological factors are involved in investment decision-making.
This tendency was so patternistic that he was able to use the data to develop Prospect Theory, which charts out, on average, the premium people are willing to pay to avoid loss and risk.