Prospect Theory Case Study

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Why didn’t he choose that one? What in her mind made her choose that?
Why does a person act a certain way? For centuries people around the world have tried to figure out why humans make certain decision, especially those that are considered irrational. One answer, prospect theory, tries to explain human behavior in terms of psychology. This theory explains behavior under the condition of uncertainty and that people end up making decision with biases. A particular problem or question can have multiple frames/scenarios, with a person’s actions differing under various manipulations of this same scenario. Having this knowledge that a person will behave a particular way when he or she is presented with a certain form of a scenario can be beneficial. It can help predict how to approach a person, but it can also lead to exploitation by those seeking profit.
Prospect theory can be explained with an example using game and loss scenarios and valence and possession effects. A common example to showcase the theory involves the use of money. Using the game scenario, you have the choice between receiving $20 right now without doing anything or playing a game and possibly winning $50, a form valence. In this type of scenario, on average, a person will choose to take the $20 and not risk losing it. People love certainty and having $20 without taking any risk pleases them enough. However, using a loss scenario, changes the outcome. You are given $50, the potential winnings from the previous frame, and told that you can possibly win this. Then, someone reaches in and takes $30 from you. You are then told that you can take the remaining $20 and go home with it or play the game to win the remaining $30 that was taken from you. Surprisingly, people...

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...e received before. Instead of putting more effort on previous papers, we are working more and longer hours to get a higher score on this one in order to improve our overall grade. The possession of higher grades and that being taken away from us lead us to write this essay. Those who already have high grades will probably not do it since the emotional effect of increasing the grade by a few points is not strong enough as the loss of a few points is to make a person perform this action. Overall, decision to avoid a loss will be more aggressive and bolder, compared to achieving a gain. This helps explain sometimes irrational decisions. The theory provides reasoning for all decision that a person can make and is the cause for a lapse in rational thought in many of these decision. Prospect Theory can be applied to literally any decision that a person makes, that is what

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