WEAKNESS OF PROSPECT THEORY • Not Readily Expandable : The original paper outlining prospect theory by Kahneman and Tverski importantly noted that the theory was developed for one shot gambles and that any application to dynamic contextual situations must wait for further research on how people react to sequential gains or losses. It is to this research we turn to draw conclusions when applying prospect theory to dynamic situations. • Coding Process Fragility: The entire decision making process can be derailed at the coding process. At this point the process is highly susceptible to how problems are framed and presented and by the norms, habits and expectation of the decision maker. • Real World Anomalies : There are a number of empirical …show more content…
CONCLUSION Here is a summary of what we've covered: • Conventional finance is based on the theories which describe people for the most part behave logically and rationally. People started to question this point of view as there have been anomalies, which are events that conventional finance has a difficult time in explaining. • Three of the biggest contributors to the field are psychologists, Drs. Daniel Kahneman and Amos Tversky, and economist, Richard Thaler. • The concept of anchoring draws upon the tendency for us to attach or "anchor" our thoughts around a reference point despite the fact that it may not have any logical relevance to the decision at hand. • Mental accounting refers to the tendency for people to divide their money into separate accounts based on criteria like the source and intent for the money. Furthermore, the importance of the funds in each account also varies depending upon the money's source and
Epstein, Richard A. The Theory of Gambling and Statistical Logic. New York: Academic, 1977. Print.
Using imagery of a tilted table with three legs, the authors have us visualize a situation in which one leg is shorter than the other two causing the table to tilt. We can affect a quick fix by putting something under the shorter leg. When we experience emotions such as...
One of the first published works on this topic is titled, Availability: A Heuristic for Judging Frequency and Probability. Written by Kahneman and his long-time colleague Amos Tversky, this article highlights their initial conclusions about errors in our decision making. This paper explored a judgmental heuristic where a person assesses the frequency of classes or probability of events by way of availability (Tversky & Kahneman, 1973). In other words, how easy relevant instances to come to mind. They suggested a large contributor is our reliance on the availability heuristic, which is judging a situation based off of examples from a similar situation (Tversky & Kahneman, 1973). For example, assume you enjoy shopping at Costco and you have gone to the same Costco once a week for the last 10 years. Therefore, you are extremely familiar with the general layout of that specific store. However, you are on vacation and visit the Costco in your vacation spot for the first time. You arrive and, in a search for produce, you walk to the location it would be in the store you are familiar with. In the new store it may or may not be in the same
Accounting is a system used to provide financial information about a business or person. Accountants prepare and analyze financial records for individuals, companies, governments, or other organizations. Accounting is a basic need for every business, and the term business has been broadened to mean any operation that deals with money. That includes families and corporations, and also schools, theaters, art galleries, charitable organizations, and even some private persons. People sometimes call accounting “the language of business” because accounting data are used to detail firms activities. Accounting tells the history of a business or person in numbers.
Kurt Lewin's work in Child Psychology, Group Psychology, Social Psychology, the psychology of prejudice and his new methods of testing and retesting theories through Action Research were all groundbreaking at the time and continue to have their impact on the field today. But, Lewin was not only a genius in terms of his work in Psychology, he also had a great ability to make the people that he was working with better at their own work. Many of his students and colleagues went on to be some of the most influential minds in psychology. The group he worked with at MIT at the end of his life was especially influential. A study in 1984 showed that "eight of the ten most cited social psychologists are direct descendants of this line of researchers (Patnoe pg.11)." It is fair to say that Kurt Lewin was the father of modern Social Psychology.
Existential and humanistic theories both stress the positives of human nature. Each theorist has their own perspective and theory in moving towards a more positive view of humanity. Three psychologists that are well know in psychology today are Maslow, Rodgers, Frankl. Each psychologist has their own theory to the process to a more positive outlook to recovery and how these concepts are used today as well.
“The value of the next best alternative foregone as the result of making a decision”(Brue, 2005)
Management accounting in organisation is very important for decision-making and to make the business more efficient and therefore increasing its profits. Is the process of preparing accounts that can help managers to make day-to-day and short-term decisions, by providing them with accurate and timely key financial and statistical information...
The efficient market, as one of the pillars of neoclassical finance, asserts that financial markets are efficient on information. The efficient market hypothesis suggests that there is no trading system based on currently available information that could be expected to generate excess risk-adjusted returns consistently as this information is already reflected in current prices. However, EMH has been the most controversial subject of research in the fields of financial economics during the last 40 years. “Behavioural finance, however, is now seriously challenging this premise by arguing that people are clearly not rational” (Ross, (2002)). Behavioral finance uses facts from psychology and other human sciences in order to explain human investors’ behaviors.
Prospect theory is a descriptive model concerning the issue of decision making under risk. The theory stated that people tend to made decision by examining the potential gain and loss comparing to reference point and exhibit certain kinds of heuristics and biases in this process such as certainty effect, reflection effect, probabilistic insurance and isolation effect. It also divided choice process into editing phases and the subsequent phase of evaluation, which were modified to framing and valuation phases in the later version (Kahneman and Tversky, 1979, Tversky and Kahneman, 1992).
Every day, many people question my passion for pursuing accounting as a profession and the first answer I think of is that I am good with numbers. However, advancing in the field has made me realize that my passion is not only based on figures. Growing up as a kid, I was privileged to have a piggy account where I would save as little as fifty cents per week. Since my parents rewarded me in monetary value as a positive reinforcement in cases of good behaviour, I was motivated to maintain good manners so long as my savings increased. As time went by, I realized I had saved way “too much” money for a little child. The challenge came in the management of the funds because I was focused on spending more on pleasurable activities. However, the guidance of my parents enabled me to prioritize on the more important things and save more. I took interest in managing may own account as a child and even pursued accounting courses in high school. The interest grew deeper because I gained more insight on the facts about accounting and the career. Also, I believed that it is career that one would be self-employed thereby avoiding the dilemmas of lacking jobs after graduating. For instance, one would easily start their own business and manage their finances comfortably.
There are many other behaviorists that are lesser known to this applied science and psychology but these five men are the main contributors to behaviorism.
The theorist I chose was Maslow, he was born in 1908 in Brooklyn, New York. He was the first of seven children born to his parents, Jewish immigrants from Russia. His parents, hoping for the best for their children in the New World, pushed him hard for academic success. He became the psychologist who many people consider the founder of a movement called humanistic psychology. The movement developed as a revolt against behaviorism and psychoanalysis, the two most popular psychological views of the mid- 1900’s. Humanistic psychologists believe individuals are controlled by their own values and choices and not by the environment, as behaviorists think, or by unconscious drives, as psychoanalyst believe. Maslow stressed the importance of studying well-adjusted people instead of just the disturbed ones.
Financial theories are the building blocks of today's corporate world. "The basic building blocks of finance theory lay the foundation for many modern tools used in areas such asset pricing and investment. Many of these theoretical concepts such as general equilibrium analysis, information economics and theory of contracts are firmly rooted in classical Microeconomics" (Oaktree, 2005)
Accounting itself is a system that people has been using for thousands of years, the system records financial information about a person or business, businesses use it in order to be able to keep and track their financial accounts and other financial information in a safe and efficient way. (Brooks, 2012)