The prospect theory is a theory of decision formulated by psychologists Israeli Daniel Kahneman and Amos Tversky in 1979 [1] . It is an alternative descriptive to expected utility theory of John von Neumann and Oskar Morgenstern . This means that while the classical theory was intended to establish the conditions ideals (''regulations'') that a decision can be defined as''rational'', the prospect theory is proposed instead to provide a description of how individuals actually behave in the face of a decision. The prospect theory focuses in particular on the decisions in conditions of risk , which are defined as decisions in which it is known (or can estimate) the probabilities associated with possible outcomes of each option available [2] .
Conditions
The most innovative aspect of this formulation is that it is based on empirical evidence. Through numerous experiments cognitive psychology Indeed, Kahneman and Tversky showed how the choices of human beings systematically violate the principles of economic rationality [3 ] . In particular, the two authors put emphasis on two important psychological phenomena, in fact connected to each other:
- L ' context effect ( framing ): The frame , that is the context in which the individual is making a choice, has a decisive effect the choice itself. In particular the way in which the problem is formulated affect the way the individual perceives the starting point (or''status quo''), against which to evaluate the possible outcomes of their actions. A famous example of this effect is Asian disease problem [3] , in which two different formulations of the same problem generally lead two different decisions by the majority of individuals.
- L ' loss aversion : For most people, the motivation to avoid a loss is greater than the motivation to make a profit. This general psychological principle, which is probably related to a kind of survival instinct, makes the same decision may give rise to conflicting choices if the results are displayed to the subject as a loss rather than loss of earnings. For example it is easier to give a better discount than to accept a price increase, although the difference between the start and end is the same [4] .
The value function
The prospect theory incorporates a mathematical formulation aspects more properly psychological evaluation with the fundamental principle of individual expected utility theory , that the most rational choice is one that maximizes the product of the expected value of each event for its probability. Kahneman and Tversky introduces a value function , in which the probabilities of possible events is weighted by the value π , which is the''weight''that had each outcome in the evaluation of the individual. The value function is described by
where 
As is clear from the representation, the value function has a non-linear: in particular, considering the center of the chart as the starting situation the decision maker ( standstill ), the function is concave in region gains and convex in region losses: This means that small changes close to the starting point (in both regions) have a greater impact on choice than large changes away from the point itself. Moreover, the curve has a slope greater losses in the region, which helps to explain the phenomenon described above as loss aversion: A gain and a loss of the same magnitude have the same effect on the choice, but a loss was proportionally greater impact.
Applications and developments
The prospect theory has had considerable success, especially in the economic sphere, such that one of its authors, Daniel Kahneman , won the 2002 the Nobel Prize 's economy . Its predictions have proved effective, especially in describing the behavior of investors and economic agents, and providing an explanation to some violations of utility theory as the sunk cost effect ( sunk cost ) and the effect of possession ( Endowment ). However, its psychological validity, and in particular its extensibility to different contexts and financially they are not universally shared. A possible application of the theory of the prospectus outside the economic context, however, was provided by military historian John A. Lynn , who argues that the theory provides an interesting, though not directly verifiable interpretation of foreign policy Louis XIV in the last years of his reign [5] .
From the point of view of decision theory , the prospect theory, although indisputable merits, violates the principle of stochastic dominance , which applies to situations where a given probability distribution of outcomes is superior to another. In 1992 was developed by the same authors, a revised version of the theory, called cumulative prospect theory [6] , including situations of stochastic dominance.
Notes
- ^ Daniel Kahneman and Amos Tversky, Prospect Theory: An Analysis of Decision Under Risk , Econometrica , 47 (2), 1979, 263-291.
- ^ Rino Rumiati, Nicolao Bonini,''Psychology decision'', Bologna, Il Mulino , 2001, pg. 13, ISBN 8815081461 .
- ^ to b Amos Tversky e Daniel Kahneman, The Framing of Decisions and the Psychology of Choice , Science , New Series, Vol. 211, No. 4481. (Jan. 30, 1981), pp. 453-458.
- ^ Amos Tversky e Daniel Kahneman, Rational Choice and the Framing of Decisions , The Journal of Business , Vol. 59, No. 4, Part 2: The Behavioral Foundations of Economic Theory. (Oct., 1986), pp. S251-S278.
- ^ John A. Lynn, (1999) The Wars of Louis XIV 1667-1714 , United Kingdom: Pearson Education Ltd, 1999, pp. 43-44
- ^ Tversky, Amos (1992) Advances in prospect theory: Cumulative representation of uncertainty . Journal of Risk and Uncertainty 5 : 297-323. DOI : 10.1007/BF00122574 .
Daniel Kahneman
the Nobel Prize for Economics to a psychologist
The official purposes of the Nobel
The Nobel Committee of the Royal Swedish Academy of Sciences decided to award the "Bank of Sweden for Economic Science 2002 "in memory of Alfred Nobel meta 'in conjunction with:
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