Microeconomics · free preview
Prospect Theory
People evaluate outcomes as gains and losses from a reference point, losses hurt about twice as much as equal gains please, and probability weighting explains lotteries and insurance bought from the same wallet.
1. The reference point
The reference point
2. Probability weighting
Probability weighting
3. Framing's older cousin
Framing's older cousin
4. What the theory is not
What the theory is not
5. Loss aversion
Why do many workers accept a 2 percent raise during 4 percent inflation but would strike against a 2 percent nominal cut?
6. The fourfold pattern
Which pair of behaviors does probability weighting predict from the same household?
7. The kink's arithmetic
Suppose gaining 10 dollars adds 10 units of value, and losses loom twice as large. Compute the value change, in units, of losing 10 dollars, and write the number as a negative.
8. The raise that feels fine
Why do many workers accept a 2 percent raise during 4 percent inflation but would strike over a nominal pay cut?
9. Losses with teeth
If losses loom roughly twice as large as equal gains in the value function, which choice pattern follows?
10. A steeper loss function
Suppose gaining 10 dollars adds 15 units of value, and losses loom 2.5 times as large. Compute the value units lost from losing 6 dollars, writing the number as negative.
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