Comments on Kahneman and Tversky The article “Prospect Theory: An Analysis of Decision Under Risk” by Daniel Kahneman and Amos Tversky presents a critique of expected utility theory as a descriptive model of decision making under risk and develops an alternative model, called perspective. theory. In their explanation, prospect theory departs from expected utility theory in two ways. First, while utility is linear, value is not. Second, while utility depends on final wealth, value is defined in terms of gains and losses. Therefore, in the following, they examine how prospect theory explains three effects that people use when making decisions. The first effect is called the certainty effect, which illustrates that subjects' choices depend on whether the options are presented as a gain or a loss. People favor certain options over options that have a chance of winning more, but also risk getting nothing. Say no to plagiarism. Get a tailor-made essay on “Why Violent Video Games Should Not Be Banned”? Get an original essay. For example, when given the choice between getting $1,000 with certainty or having a 50% chance of getting $2,500, participants will choose some $1,000 in preference to the uncertain chance of getting $2,500, but When faced with a certain loss of $1,000 versus a 50% chance of not losing or a loss of $2,500, we often choose the risky alternative. Therefore, when faced with certain losses, people engage in risk-seeking behavior to avoid a larger loss and are reluctant to take risks to obtain gains. The second effect is the isolation effect, which refers to people's tendency to ignore the elements common to alternatives and focus on the components that set them apart. Eliminating common elements eases the burden of comparing alternatives, but preferences can also be modified by different representations of probabilities. Then, Daniel Kahneman and Amos Tversky present 2 scenarios to the participants. In both cases, subjects are given an initial amount of money and then must choose between two alternatives. (Problems 11 and 12) Although the initial sums are different in the two cases, it turns out that the two situations are equivalent. However, participants made opposite choices in the two cases, with the majority choosing risk aversion option B in scenario 1 and loss aversion option C in scenario 2. The last effect introduced is loss aversion. An important result of Kahneman and Tversky's work is that individuals' attitudes toward the risks of gains may be very different from their attitudes toward the risks of losses. Most people will behave in a way that avoids losses because their reaction to loss is more extreme than their reaction to gain, even if the probability of experiencing these losses is tiny. The pain of losing also explains why, when gambling, winning $100 and then losing $80 feels like a net loss, even though you're actually ahead by $20. In conclusion, people normally perceive outcomes as gains and losses, rather than as end states of wealth or well-being. By examining the certainty effect, the isolation effect, and loss aversion, Kahneman and Tversky discover that people seek risk-seeking behavior for losses and risk-averse behaviors for gains. According to prospect theory, value is assigned to gains and losses rather than final assets, and probabilities are.