Category: Prospect theory

Risk neutral preferences
In economics and finance, risk neutral preferences are preferences that are neither risk averse nor risk seeking. A risk neutral party's decisions are not affected by the degree of uncertainty in a se
Automation bias
Automation bias is the propensity for humans to favor suggestions from automated decision-making systems and to ignore contradictory information made without automation, even if it is correct. Automat
Prospect theory
Prospect theory is a theory of behavioral economics and behavioral finance that was developed by Daniel Kahneman and Amos Tversky in 1979. The theory was cited in the decision to award Kahneman the 20
Description-experience gap
The description-experience gap is a phenomenon in experimental behavioral studies of decision making. The gap refers to the observed differences in people's behavior depending on whether their decisio
Behavioral strategy
Behavioral strategy refers to the application of insights from psychology and behavioral economics to the research and practice of strategic management. In one definition of the field, "Behavioral str
Behavioral economics
Behavioral economics studies the effects of psychological, cognitive, emotional, cultural and social factors on the decisions of individuals or institutions, such as how those decisions vary from thos
Framing effect (psychology)
The framing effect is a cognitive bias where people decide on options based on whether the options are presented with positive or negative connotations; e.g. as a loss or as a gain. People tend to avo
Reference dependence
Reference dependence is a central principle in prospect theory and behavioral economics generally. It holds that people evaluate outcomes and express preferences relative to an existing reference poin
Thinking, Fast and Slow
Thinking, Fast and Slow is a 2011 book by psychologist Daniel Kahneman. The book's main thesis is that of a dichotomy between two modes of thought: "System 1" is fast, instinctive and emotional; "Syst
Availability heuristic
The availability heuristic, also known as availability bias, is a mental shortcut that relies on immediate examples that come to a given person's mind when evaluating a specific topic, concept, method
Certainty effect
The certainty effect is the psychological effect resulting from the reduction of probability from certain to probable. It is an idea introduced in prospect theory. Normally a reduction in the probabil
Anchoring (cognitive bias)
The anchoring effect is a cognitive bias whereby an individual's decisions are influenced by a particular reference point or 'anchor'. Both numeric and non-numeric anchoring have been reported in rese
Loss aversion
Loss aversion is the tendency to prefer avoiding losses to acquiring equivalent gains. The principle is prominent in the domain of economics. What distinguishes loss aversion from risk aversion is tha
Hindsight bias
Hindsight bias, also known as the knew-it-all-along phenomenon or creeping determinism, is the common tendency for people to perceive past events as having been more predictable than they actually wer
Uncertainty refers to epistemic situations involving imperfect or unknown information. It applies to predictions of future events, to physical measurements that are already made, or to the unknown. Un
Pseudocertainty effect
In prospect theory, the pseudocertainty effect is the tendency for people to perceive an outcome as certain while it is actually uncertain in multi-stage decision making. The evaluation of the certain
Framing (social sciences)
In the social sciences, framing comprises a set of concepts and theoretical perspectives on how individuals, groups, and societies organize, perceive, and communicate about reality. Framing can manife
Risk aversion (psychology)
Risk aversion is a preference for a sure outcome over a gamble with higher or equal expected value. Conversely, the rejection of a sure thing in favor of a gamble of lower or equal expected value is k
Cumulative prospect theory
Cumulative prospect theory (CPT) is a model for descriptive decisions under risk and uncertainty which was introduced by Amos Tversky and Daniel Kahneman in 1992 (Tversky, Kahneman, 1992). It is a fur
In accounting, finance, and economics, a risk-seeker or risk-lover is a person who has a preference for risk. While most investors are considered risk averse, one could view casino-goers as risk-seeki
Representativeness heuristic
The representativeness heuristic is used when making judgments about the probability of an event under uncertainty. It is one of a group of heuristics (simple rules governing judgment or decision-maki
Equity premium puzzle
The equity premium puzzle refers to the inability of an important class of economic models to explain the average equity risk premium (ERP) provided by a diversified portfolio of U.S. equities over th
Illusory truth effect
The illusory truth effect (also known as the illusion of truth effect, validity effect, truth effect, or the reiteration effect) is the tendency to believe false information to be correct after repeat
Endowment effect
In psychology and behavioral economics, the endowment effect (also known as divestiture aversion and related to the mere ownership effect in social psychology) is the finding that people are more like
Status quo bias
Status quo bias is an emotional bias; a preference for the maintenance of one's current or previous state of affairs, or a preference to not undertake any action to change this current or previous sta
Planning fallacy
The planning fallacy is a phenomenon in which predictions about how much time will be needed to complete a future task display an optimism bias and underestimate the time needed. This phenomenon somet
Attribute substitution
Attribute substitution, also known as substitution bias, is a psychological process thought to underlie a number of cognitive biases and perceptual illusions. It occurs when an individual has to make