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Reviewing the book of a Nobel Laureate in Economics is no easy task. And if the particular laureate is a psychologist, it complicates matters further. Of course, it could just be a delusion, that someone of the stature of Daniel Kahneman even needs to have his book reviewed. But that would be my System 1 talking, the one that is automatic, quick on the draw and happy to jump to conclusions. I can't really rely much on System 2 because according to Kahneman, it is reliable but lazy, preferring to surrender to the mighty System 1 as it's easier that way. In case you're wondering who these characters are, let me introduce you to Kahneman's two protagonists, who like any other protagonists are a reasonable mix of good and bad, flaws and perfection. Intuition, that hidden faculty which has received both empirical and mystical attention, is what this book is all about, rather about its biases. Kahneman aims to provide the appropriate vocabulary by which we can identify and understand errors of judgment and choice. What began as a work on intuitive statistics with Amos Tversky in 1969 led to almost 27 years of association studying biases, heuristics, errors and choices that affect our intuitive decisions. Along the way they managed to turn upside down a 300 year old theory of economics propounded by Bernoulli and other rational theories devised by Econs, the sub species of the human species that specialize in Economics. The Prospect Theory, their contribution to the field of human decision making is what essentially won Kahneman his Nobel in 2002. Tversky was unfortunately unable to share it due to his untimely death in 1996. This book is dedicated to Tversky and has numerous instances and episodes which both questioned established rational theories and offered proof of Humans with flawed decisions and judgments. In Kahneman's words this book describes, " the marvels as well as the flaws of intuitive thought. "
The origin of prospect theory is the desire to test the intuitive statistician in the real world. The development of this theory by the cognitive psychologists Kahneman and Tversky can be traced to the formers work in cognitive psychophysics, in which deviations from average behavior are termed (statistical) errors; and the latters work on decision theory, with its normative vs. descriptive framework. The combination of these two types of probabilistic psychology culminated in a new descriptive theory of human decision making in the real world, coined Heuristics and Biases. The 1979 Econometrica article applies this new descriptive theory to economists EUT. It equates the intuitive statistician with the rational economic man and shows how it descriptively fails.
In: M. W. Eysenck & D. Groome. Cognitive Psychology: Revisiting the Classical Studies. Los Angeles, London: Sage.
Heuristics and biases: Beyond Tversky and Kahneman's (1974) judgment under uncertainty2015 •
It is no exaggeration to say that today’s psychology would not be what it is without Daniel Kahneman’s and Amos Tversky’s seminal work on heuristics and biases, as summarised in a Science article (Tversky & Kahneman, 1974) that was cited over 7,000 times – an unbelievable rate for a psychology article. A few years before this work spread like wildfire. The rationalist metaphor of a computer-like human mem-ory and the man-as-scientist analogy conveyed in theories of consistency (Abelson, 1968) and attribution (Jones, Kanouse, Kelley, Nisbett, Valins, & Weiner, 1987) had brought about the so-called cognitive revolution (Dember, 1974). However, this naïvely optimistic view on the human mind turned rapidly into deflating pessimism when statistical tools began to dominate research and theorising came under the dominating influence of Kahneman and Tversky’s research programme.
5th International Scientific Research E-Congress (IBAD-2020)
A LITERATURE REVIEW OF THE PROSPECT THEORY2020 •
This article presents a review of prospect theory which was an alternative model for expected utility theory. The objective of this paper is to examine in detail the original work of Kahneman and Tversky (1979) entitled ‘Prospect theory: An analysis of decision under risk’. Their work is aimed to demonstrate how the expected utility theory of the economic model was inadequate and inconsistent in explaining the human decision-making process. They came with a more convincing model called prospect theory. The theory contains two basic stages for choice decision-making. These are the editing stage and the evaluation stage. The theory stated that carriers of utility are changes in the existing state of affairs, rather than the final state. However, changes in the existing state of affairs and the final state are interdependent. Hence, we should consider value(utility) as a function of the current state of affair (reference point) and the size of change from that reference point i.e., positive or negative. For example, for the person who already owns specific assets, purchasing the same additional asset may bring less value (utility) than the value (utility) it will bring to a person who does not own that specific asset. According to the expected utility theory, two individuals should have the same level of utility for the same amount of gain or loss. However, in prospect theory, the same amount of gain or loss does not bring the same feeling for two different persons or, even for a single person. Kahneman and Tversky(KT) suggest that their theory can be extended to the particular situation of prospects in which the likelihood of the events is not quantified. They also stated that as long as the outcomes are coded as gains and losses relative to the standard point, the proposed value function for money can be valid for other nonmonetary attributes. KT popular theory (PT) was later extended in several angles by themselves and by other researchers. The applications of the prospect theory are not only limited to the monetary attributes but also for other non-monetary aspects such as Political science, Cognitive neuroscience, and other areas that require the decision-making process.
Cognitive Psychology
How the twain can meet: Prospect theory and models of heuristics in risky choice2017 •
Journal of Economic Methodology
PROSPECT THEORY IN THE WILD: HOW GOOD IS THE NONEXPERIMENTAL EVIDENCE FOR PROSPECT THEORY2019 •
Prospect theory is widely thought to be one of the best-confirmed accounts of human decision making under risk. However, recent experimental evidence and reviews of the experimental literature raise doubts about that claim. This paper asks what the nonexperimental, observational evidence shows about prospect theory. There are numerous claims in the literature that various kind of observational data provide strong support for prospect theory. We investigate the veracity of such claims and in the process use them to illustrate and support some important ideas in the philosophy of science. Section II sketches a general philosophy of science framework that emphasises the need to clarify which versions of a theory, and which parts of a theory, observational evidence is supposed to support. Section III lays out some canonical models of choice under risk, along with the extant versions of prospect theory and their various components. Section IV looks at the equity premium puzzle and challenges the claim that prospect theory is well supported because it explains puzzling portfolio choices. Section V examines a major international survey thought to support prospect theory and argues that the support for prospect theory is questionable, both for statistical reasons and because the evidence itself is mixed. Section VI concludes.
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