Prospect Theory: An Analysis of Decision Under Risk

Evstigneev, Igor V.; Bahsoun, Wael; Taksar, Michael; MacLean, Leonard C.; Ziemba, William T.

doi:10.1142/9789814417358_0006

Cited by 2,272 publications

(2,517 citation statements)

References 19 publications

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“…Our findings build on a connection noted between selection in utero and 'portfolio theory' (Catalano et al, 2014;Forbes, 2009;Kahneman & Tversky, 1979: Markowitz, 1952. This theory suggests that a mother has a portfolio of living and/or potential children among whom she must invest her limited time and energy.…”

Section: Discussionsupporting

confidence: 71%

Twins Less Frequent Than Expected Among Male Births in Risk Averse Populations

et al. 2015

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Male twin gestations exhibit higher incidence of fetal morbidity and mortality than singleton gestations. From an evolutionary perspective, the relatively high rates of infant and child mortality among male twins born into threatening environments reduce the fitness of these gestations, making them more vulnerable to fetal loss. Women do not perceive choosing to spontaneously abort gestations although the outcome may result from estimates, made without awareness, of the risks of continuing a pregnancy. Here, we examine whether the non-conscious decisional biology of gestation can be linked to conscious risk aversion. We test this speculation by measuring the association between household surveys in Sweden that gauge financial risk aversion in the population and the frequency of twins among live male births. We used time-series regression methods to estimate our suspected associations and Box-Jenkins modeling to ensure that autocorrelation did not confound the estimation or reduce its efficiency. We found, consistent with theory, that financial risk aversion in the population correlates inversely with the odds of a twin among Swedish males born two months later. The odds of a twin among males fell by approximately 3.5% two months after unexpectedly great risk aversion in the population. This work implies that shocks that affect population risk aversion carry implications for fetal loss in vulnerable twin pregnancies.

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Section: Discussionsupporting

confidence: 71%

Twins Less Frequent Than Expected Among Male Births in Risk Averse Populations

et al. 2015

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“…In a seminal paper, Kahneman and Tversky (1979) attempted to address this problem by first identifying four of the most important deviations from maximization (defined here as violations of the assumption that people maximize expected return), replicating them in one experimental paradigm, and finally proposing prospect theory, a model that captures the joint effect of all these phenomena and thus allows clear predictions. Specifically, Kahneman and Tversky replicated-and prospect theory addresses-the certainty effect (Allais paradox, Allais, 1953; see Row 1 in Table 1), the reflection effect (following Markowitz, 1952; see Row 2 in Table 1), overweighting of rare events (following Friedman & Savage, 1948;see Row 3 in Table 1), and loss aversion (following Samuelson, 1963; see Row 4 in Table 1).…”

Section: From Anomalies To Forecasts: Toward a Descriptive Model Of Dmentioning

confidence: 99%

From anomalies to forecasts: Toward a descriptive model of decisions under risk, under ambiguity, and from experience.

Erev¹,

Ert

Plonsky³

et al. 2017

Psychological Review

208

258

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Experimental studies of choice behavior document distinct, and sometimes contradictory, deviations from maximization. For example, people tend to overweight rare events in oneshot decisions under risk, and to exhibit the opposite bias when they rely on past experience.The common explanations of these results assume that the contradicting anomalies reflect situation-specific processes that involve the weighting of subjective values and the use of simple heuristics. The current paper analyzes 14 choice anomalies that have been described by different models, including the Allais, St. Petersburg, and Ellsberg paradoxes, and the reflection effect. Next, it uses a choice prediction competition methodology to clarify the interaction between the different anomalies. It focuses on decisions under risk (known payoff distributions) and under ambiguity (unknown probabilities), with and without feedback concerning the outcomes of past choices. The results demonstrate that it is not necessary to assume situation-specific processes. The distinct anomalies can be captured by assuming high sensitivity to the expected return and four additional tendencies: pessimism, bias toward equal weighting, sensitivity to payoff sign, and an effort to minimize the probability of immediate regret. Importantly, feedback increases sensitivity to probability of regret. Simple abstractions of these assumptions, variants of the model Best Estimate And Sampling Tools (BEAST), allow surprisingly accurate ex ante predictions of behavior. Unlike the popular models, BEAST does not assume subjective weighting functions or cognitive shortcuts.Rather, it assumes the use of sampling tools and reliance on small samples, in addition to the estimation of the expected values.

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“…In this instance the index treats insecurity as a function of current income and a weighted sum of the differences between lags ‫ݔ‬ ௧ିଵ , ‫ݔ‬ ௧ିଶ , … , ‫ݔ‬ ଵ and combines these two components with a time discounted weighting function that emphasizes the recent over the distant past. An asymmetric weight is also used to emphasize downward movements in line with the theory of loss aversion of Kahneman and Tversky (1979). The index can be written as…”

Section: Income Stream Indicatorsmentioning

confidence: 99%

The effect of economic insecurity on mental health: Recent evidence from Australian panel data

Rohde

Tang

Osberg

et al. 2016

Social Science & Medicine

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This paper estimates the impact of economic insecurity on the mental health of Australian adults. Taking microdata from the 2001-2011 HILDA panel survey, we develop a conceptually diverse set of insecurity measures and explore their relationships with the SF-36 mental health index. By using fixed effects models that control for unobservable heterogeneity we produce estimates that correct for endogeneity more thoroughly than previous works. Our results show that exposure to economic risks has small but consistently detrimental mental health effects. The main contribution of the paper however comes from the breadth of risks that are found to be harmful. Job insecurity, financial dissatisfaction, reductions and volatility in income, an inability to meet standard expenditures and a lack of access to emergency funds all adversely affect health. This suggests that the common element of economic insecurity (rather than idiosyncratic phenomena associated with any specific risk) is likely to be hazardous. Our preferred estimates indicate that a standard deviation shock to economic insecurity lowers an individual's mental health score by about 1.4 percentage points. If applied uniformly across the Australian population such a shock would increase the morbidity rate of mental disorders by about 1.7%.

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Prospect Theory: An Analysis of Decision Under Risk

Cited by 2,272 publications

References 19 publications

Twins Less Frequent Than Expected Among Male Births in Risk Averse Populations

Twins Less Frequent Than Expected Among Male Births in Risk Averse Populations

From anomalies to forecasts: Toward a descriptive model of decisions under risk, under ambiguity, and from experience.

The effect of economic insecurity on mental health: Recent evidence from Australian panel data

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