Sign In
Not register? Register Now!
Essay Available:
Pages:
3 pages/≈825 words
Sources:
5 Sources
Level:
MLA
Subject:
Mathematics & Economics
Type:
Research Paper
Language:
English (U.S.)
Document:
MS Word
Date:
Total cost:
$ 15.55
Topic:

How Prospect Theory Contradicts Classical Economic Theories (Research Paper Sample)

Instructions:

Https://www(dot)behaviroaleconomivs(dot)com/introduction-behavioral-economics/
You task is
1 Chose the topic of Prospec theory
2 define the theory
3 explain how it contradicts classical economic thinking
4 discuss the implicayions of it
5 how might we benefit by better understanding this?
6 have you made any mistakes associated with the chosen behavioral theory?

source..
Content:

Name:
Course Code:
Date:
The Prospect Theory of Behavioral Economics
Definition of Prospect Theory
According to CITATION Bar13 \l 1033 (Barberis, 2013)prospect theory suggests that humans are not rational in decision making which entails losses and gains, and they think in terms of ‘expected utility relative to reference point rather than absolute outcomes.’ when similar options with similar outcomes are framed differently, Kahneman and Tversky found that humans were more risk-averse, and individuals disliked losses more than equivalent gains such that they were willing to risk more to avoid a loss CITATION Lev96 \l 1033 (Levy, 1996). In other words, if a concept has two similar choices with similar outcomes for the individual, and one of the options if framed in the context of the potential gains the individual can derive and the other in terms of the potential losses the individual can suffer, individuals are more likely to choose the option presenting the gains.
How Prospect Theory Contradicts Classical Economic Theories
In traditional economic theory, economists assume that humans are rational decisionmakers. They evaluate information and calculate the value is accounting for the potential losses and or gains and make the decision that is in their best interest. In a classical economic perspective, ‘framing’ of the information is irrelevant because the potential losses and gains from the situation are equal. On the other hand, prospect theory shows that classical theorists and Kahneman overlooked the innate human nature and Tversky argues that traditional economic models and reality are rarely aligned. Concisely, according to prospect theory, humans are not rational decision-makers, and their decisions are anchored on the potential gains rather than the facts.
The implications of Prospect Theory
Prospect theory implies that since humans are not rational decision-makers even with factual information, the presentation of information is important. Thus, ‘relative gain or loss relative to a reference point is valued more than an absolute gain or loss’ CITATION Jha14 \l 1033 (Jha & Powell, 2014). This is unlike the perspective outlines by von Neuman Morgenstern’s classical economic theory of expected utility (UET). According to expected utility theory, if a gamble is framed regarding its losses and or gains it is not important but the result CITATION Lev06 \l 1033 (Levin, 2006). Hence, a new perspective that overlooks ultimate determinant of utility as described in expected utility theory implies that value is bas

...
Get the Whole Paper!
Not exactly what you need?
Do you need a custom essay? Order right now:

Other Topics:

  • What Is The Relationship Between Oil And Economic Development
    Description: The world is major large dependent on oil products, therefore reviewing the relationship between oil products and the growth of the economy is very important. ...
    12 pages/≈3300 words | 8 Sources | MLA | Mathematics & Economics | Research Paper |
  • Cannabis retail in Canada. Models of Cannabis Retail Systems. Methodology. Research Paper
    Description: After years of debate and multiple legislative efforts, Canada joined the few nations to legalize the recreational use of Cannabis (commonly known as marijuana) earlier this year through the Royal Assent of the Cannabis Act (Bill-45) (Government of Canada)....
    8 pages/≈2200 words | 5 Sources | MLA | Mathematics & Economics | Research Paper |
  • Research Minimum Price On Agriculture Products
    Description: Thesis: Would agriculture industry be better if the government set a minimum price on agriculture products?...
    4 pages/≈1100 words | 3 Sources | MLA | Mathematics & Economics | Research Paper |
HIRE A WRITER FROM $11.95 / PAGE
ORDER WITH 15% DISCOUNT!