Prospect Theory - Daniel Kahneman

As some of you may know Daniel Kahneman won Nobel Economy Award in 2002 with a weird decision making theory about economical decision with the help of Amos Tversky. It is quite intriguing that these 2 pshycologs won a nobel economy award in the field of economics with a simple theory and observation.

Origins of the Theory

Well in 1970's these two pshycologs named Daniel Kahnemann and Amos Tversky came up with something called Prospect Theory. But what are the fundamentals of this theory ? to be honest it was a quite decision making experiment for people who is going to make economical decisions.

The origin of the came from the observation of people who couldn't maximize the expected benefit and this study is getting mostly use currently in the field of economics. These 2 sociologists decided to proove their theory by asking 2 simple questions to the volunteers to the experiment.

In the first question people need to decide one of the options and first option was you will lose 100.000k Dollars and second option was something like that we will flip a coin and if the coin comes tails you won't pay anything however if it comes heads you have to pay 300.000k dollars. Obviously with these conjointed situations they tried to observe people's decision making in this situation.

Second question was something more positive first option was saying you are going to win 100k dollar and second option was something similar and it encourages people to gamble and it was saying we will flip a coin if it comes tail you won't earn anything however it comes tails you will earn 300k dollars.

When they examine the results in the each individual situation it was quite intriguing in the first question higher percentage of people choosen the second condition however in the second condition it was first option. When we think about the financial way both of the questions are same one is negative other one is positive.

As a deduction from this experiment most of the people tend to get risk if they are going to lose in those situation however people prefer stable income eventhough their earnings might be triple after a coin flip.

This theory shows how people think about economical investments and risk taking behavior and with that it also gave Daniel Kahnemann a cool nobel prize in the field of economics

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