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Framing Effect: Heera, Neha, Sai Vaishnavi, Kritvi

Prospect theory is a descriptive model of decision making that is an alternative to expected utility theory. It proposes that individuals make decisions based on the potential value of losses and gains rather than final outcomes. A key concept is loss aversion, where losses loom larger than gains. People are generally risk averse regarding potential gains but risk seeking regarding potential losses. An influential 1981 study by Tversky and Kahneman demonstrated that framing outcomes as gains or losses can significantly impact decision making.

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33 views

Framing Effect: Heera, Neha, Sai Vaishnavi, Kritvi

Prospect theory is a descriptive model of decision making that is an alternative to expected utility theory. It proposes that individuals make decisions based on the potential value of losses and gains rather than final outcomes. A key concept is loss aversion, where losses loom larger than gains. People are generally risk averse regarding potential gains but risk seeking regarding potential losses. An influential 1981 study by Tversky and Kahneman demonstrated that framing outcomes as gains or losses can significantly impact decision making.

Uploaded by

Kritviii
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Framing Effect

Heera, Neha, Sai Vaishnavi, Kritvi


❏ Considered a part of a normative model
❏ In this theory- you multiply the utility of an
outcome by the probability of that outcome that
yields the highest number.

Example:

Expected Utility Theory There are 2 gambles

Gamble A: $10 for certain

Gamble B: 6% of $200

Since this is a normative theory- you would take


the risk of taking gamble B

The expected utility of the option A is 10 x 1 = $10

The expected utility of option B is 200 x 0.06= $12


❏ Aim of prospect theory was to devise a descriptive
theory of decision-making under risk.
❏ Founded on concept of loss aversion which is a tendency
where investors are so fearful of losses that they focus
on trying to avoid a loss more so than on making gains.
Loss aversion: The idea that losses loom larger than
gains, despite the size of the loss.
Prospect Theory ❏ People tend to overweigh options that are certain, and
are risk averse for gains. We would rather get an
assured, lesser win than take the chance at winning
more (but also risk possibly getting nothing). The
Individuals think about utilities as changes opposite is true when dealing with certain losses:
from a reference point people engage in risk-seeking behavior to avoid a
bigger loss.
❏ Example: When given a choice of losing 10% of $1000
or having a 90% chance of winning $1000, most would
choose the latter, despite both choices being the same.

Source: https://www.nngroup.com/articles/prospect-
theory/
- Divided subjects into two groups and gave them a
particular problem that was based on a hypothetical
situation (in this case, a virus outbreak causing 600
deaths)
- Each group was given two alternate programs to

Tversky and Kahneman -


combat the disease
In group 1, program A stated that 200 people will be

(1981) saved and program B stated that there was a ⅓


probability that all 600 people would be saved and ⅔
probability that no one would be saved
- In group 2, program A stated that 400 people will die
and program B stated that there would be a ⅓
probability that no one would die and ⅔ probability that
600 people would die
- There was a notable difference between the number of
people who chose a program in each group. Reason:
Shift in reference point (in terms of gains or losses)
- It was concluded that the judgement shifts based on
this reference point.
❏ Depending on whether outcomes are ‘’framed’’
as gains or losses- you receive a different
judgment from different people.
❏ Subjects are generally more willing to take risks
to avoid a loss.
❏ The basic is ‘’Avoiding Risks but taking risks to
avoid losses’’
The Framing Effect
~Thank You Everyone~

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