Prospect Theory in the Wild: Evidence from the Field

Publisher Website
Google Scholar
Abstract
The workhorses of economic analysis are simple formal models that can explain naturally occurring phenomena. Reflecting this taste, economists often say they will incorporate more psychological ideas into economics if those ideas can parsimoniously account for field data better than standard theories do. Taking this statement seriously, this article describes 10 regularities in naturally occurring data that are anomalies for expected utility theory but can all be explained by three simple elements of prospect theory: loss aversion, reflection effects, and nonlinear weighting of probability; moreover, the assumption is made that people isolate decisions (or edit them) from others they might be grouped with (Read, Loewenstein, and Rabin 1999; cf. Thaler, 1999). I hope to show how much success has already been had applying prospect theory to field data and to inspire economists and psychologists to spend more time in the wild. The 10 patterns are summarized in Table 16.1. To keep the article brief, I sketch expected utility and prospect theory very quickly. (Readers who want to know more should look elsewhere in this volume or in Camerer 1995 or Rabin 1998a). In expected utility, gambles that yield risky outcomes xi with probabilities pi are valued according to Σpiu(xi), where u(x) is the utility of outcome x. In prospect theory they are valued by Σπ(pi)v(xi - r), where π(p) is a function that weights probabilities nonlinearly, overweighting probabilities below.

This publication has 0 references indexed in Scilit: