Abstract
Behavioral decision derived from the paradox of the expected utility theory. With the introduction of cognitive psychology, it opened up a road for the field of behavioral decision. Now countless scholars are wandering in behavioral decision related with prospect theory, it is worth mentioning the prospect theory proposes Daniel Kahneman won the Nobel Prize in economics in 2002. It should be the recognition for his important contribution to the academic. This paper is a review of prospect theory.
Highlights
Through a large number of experimental studies, behavioral psychologists have found that people’s decisions are not always rational, and their risk attitudes and behaviors often deviate from the assumption of optimal behavior patterns in traditional economic theories
Kahneman and Tversky shift the traditional approach to assessing aggregate effects. They measure the total value of a prospect (V), which is determined primarily by a combination of the value function (v) and the decision weight function
The value function reflects the subjective value of the result, and the decision weight function represents the decision weight corresponding to the probability (P) of the result, which is essentially different from the objective probability and reflects the influence of probability on the whole prospect value
Summary
Through a large number of experimental studies, behavioral psychologists have found that people’s decisions are not always rational, and their risk attitudes and behaviors often deviate from the assumption of optimal behavior patterns in traditional economic theories. The individual first edits the ultimate possible prospect It emphasizes that the “prospect” is different from the simple “expectation”) and evaluates the edited prospect. Researchers in the field of behavioral economics have put a lot of thought into how prospect theory should be applied in various fields. It is too early to declare this research effort an unqualified success, but the rapid progress of the last decade makes me optimistic that at least some of the insights of prospect theory will eventually find a permanent and significant place in various fields
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