Talk:Prospect theory/Archive 1

Archive 1

criticisms of prospect theory

The status quo criticisms of prospect theory from economists are much less interesting than those leveled by people like Gerd Gigerenzer. I'm definitely a neophyte with this, but would be curious to know wether or not he's a lone wolf in this regard. The little I've read by him seems fairly sophisticated and on the mark.

I'm unfamiliar with his work, but feel free to add what you know. I hope he's not attacking straw men, though, Tversky and co. don't say that biases are necessarily sub-optimal, they just identify that decisions aren't made in the way a rational caluclating machine (homo economicus) would. Psychobabble 01:58, 20 October 2005 (UTC)

Don't worry, he's more like a lone wolf (but with a big working group) who tries to prove that only simple models can explain the world ('fast and frugal'). Economists don't notice him much.

Can anyone make this article understandable?

I am totally lost basically at every word. I dont understand at all what it is even about. Is there some real life implications? It was about society after all (right?). Considering that it is supposed to be quite important I guess it would be nice if even non-scientists could get a introduction. Or perhaps a real world example could help? --Thomas 02:57, 13 February 2007 (UTC)

Well, I could give it a try, e.g. by adding some more fluff at the beginning, but please promise to give some further input, once I am donw with my improvements... Rieger 05:30, 19 February 2007 (UTC)

Done, hope it is a little better now... However, the article needs some more attention: There are many repetitions, complicated wording, it's fuzzy towards the end, many interesting things are missing, the references are assorted etc. Would be nice at least to explain the four-fold pattern of risk-attitudes, for instance! If I just had more time! Maybe somebody can help? :( Rieger 05:53, 19 February 2007 (UTC)

Added a little bit more. Maybe somebody can improve my bad writing a little? If I had more time, I would also add a table for the four-fold pattern of risk-attitudes... Rieger 20:45, 23 February 2007 (UTC)

"Real world Example" ? Poker. The Gnome 11:33, 2 June 2007 (UTC)

Prospect Theory examples

Anyone think some examples might be warranted? I recently came across an interesting idea that Louis the XIV's actions in regards to his many wars (War of Devolution, Franco-Dutch War, Nine Years War, and War of the Spanish Succession) are a prime example of prospect theory. Anyone think that would be a worthwhile addition to the article? I can provide proper references, as well. - The Fwanksta 17:20, 19 September 2007 (UTC)

I don't find the explanation of prospect theory to be at all clear. Too much focus on "implications" and not enough explation of the theory. More examples would help. —Preceding unsigned comment added by 132.178.133.65 (talk) 21:45, 25 September 2007 (UTC)

Another good source

It's been suggested this source is a better introduction to the subject. http://www.econport.org/econport/request?page=man_ru_advanced_prospect Mathiastck 23:39, 14 August 2006 (UTC)

• Looks like a nice introduction to this topic. However, it mentions a couple of effects that are not that closely related to Prospect Theory and omits some points. Something in this style would also be too lengthy for a wikipedia entry, I think. Nevertheless, I will add a link to this page, since it is a very useful resource by itself! Rieger 18:11, 15 August 2006 (UTC)

 Could you detail your points please Rieger?  I've read the article referred to and it seems very
 clearly and succinclty set out to me.  It seems a lot simpler too IMHO and on a quite 
 technical topic.
 LookingGlass (talk) 22:14, 13 February 2008 (UTC)

NPOV

This article is cluttered and disorganized, but worse is that in its meandering way it touts how PT will solve every intellectual mystery ever. We need to put more criticism and focus more on what prospect theory is, rather than advertise for it. By the way I do believe that PT is an excellent model and should be taught in undergraduate economics classes as a more realistic alternative to Von Neumann-Morgenstern expected utility in situations where the model calls for this level of specificity. Crasshopper (talk) 06:29, 23 March 2008 (UTC)

Example?

Could someone who understands PT edit the example section so that it makes sense? There are grammar errors if read aloud and avoiding words like "convexity" or at least defining them would be a great idea for us uneducated masses. —Preceding unsigned comment added by 75.61.123.208 (talk) 07:58, 27 December 2008 (UTC)

Merge proposal

Cumulative prospect theory should be merged into this article. It can't fill its own article, and is defined mainly through its differences with Prospect theory. There is no reason for it to have its own page. --76.217.95.43 (talk) 02:54, 24 February 2008 (UTC)

I agree. The work is done by similar researchers, and one is a refinement of the earlier idea. It seems like merging would be a good idea. Edchi (talk) 02:30, 28 February 2008 (UTC)

Well, I prefer two reasonably sized articles over one lengthy article. If a reader wants to know about one thing, he can read only one. If he wants to know both, there are links... Instead of merging (which would make some work) I would rather propose to improve the article (in particular adding limitations of the theory etc.) But that's only my opinion. Rieger (talk) 20:54, 31 August 2008 (UTC)

I agree to the merge. While it would nice to have two shorter articles, I doubt that someone new to this would understand cumulative prospect theory with no prior knowledge about Prospect theory. The alternative would be to introduce Prospect Theory in Cum, which would just add to the reading burden - overall - to anyone wanting to know about both. —Preceding unsigned comment added by KapparOlsen (talk • contribs) 22:30, 26 July 2009 (UTC)

Agree with the merge. Cumulative prospect theory makes much more sense as a section than as its own article, especially as the CUm. article has only one reference, and that reference presents it as an advance in prospect theory. If both articles were fully developed, then pretty much all the content of the Cum. article will be in this one, so why have a separate article? MartinPoulter (talk) 15:59, 17 August 2009 (UTC)

I disagree with the merge. They are two separate theories, with somewhat different applications. While cumulative prospect theory takes some parts of prospect theory, it is still seperate. Also, from an academic view, I have seen them referenced separately (I.E. prospect theory has not been superceded by cumulative prospect theory). Just my two cents though. Chrislk02 ^{Chris Kreider} 05:53, 9 November 2009 (UTC)

Disagree with merge. CPT is a major theory in both psychology and economics. You don't have to know about PT first in order to understand CPT. IMHO, what this article needs most is to be rewritten. The article doesn't provide enough of the detail about CPT (what evidence it is trying to explain, more details about how CPT works etc.) The two equations currently provided are to abstract to give any real idea of how CPT works, it would make much more sense to only talk about the equations for the discrete case and give real examples. There is also no discussion about probability weighting functions, an other major component of CPT. There have been over 2500 citations of the paper, many of them with interesting results. There are definitely other sources out there that should be cited in this article. Yes, CPT is an "advancement" over PT, but merging the two articles would hide just how big of an advancement CPT is. Ggdh (talk) 19:09, 11 November 2009 (UTC)

Disagree with merge. Encyclopedic utility is best served with focussed articles and short lead sections, not larger all-comprising ones. CPT article needs improvement, and it not doubt has potential, with 400+ hits i Gbooks alone. Worthy as s stand-alone. Power.corrupts (talk) 10:54, 19 January 2010 (UTC)

USELESS AS AN ENCYCLOPEDIA ENTRY

There are several complaints of incomprehensibility above. Come on! An encyclopedia entry is not for afficionados - it is for people who want to know what prospect theory is. 110.20.15.197 (talk) 08:23, 26 February 2010 (UTC) Pepper

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I cannot understand more than half of what is written. This is not an afficionado vs casual reader issue. Someone who knows this topic please edit it to make it at least a little readable

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—Preceding unsigned comment added by Ravi2445 (talk • contribs) 02:59, 10 July 2010 (UTC)

Picture

Can whoever made the picture fix that line so that it is smooth? I know it's a small matter, but it's just not aesthetically pleasing. thank you! 70.111.248.60 02:26, 19 April 2006 (UTC)

 If the following description in the article is correct: 
 "...people decide which outcomes they see as basically identical and they set a reference point
 and consider lower outcomes as losses and larger as gains." 
 then shouldn't the "Reference Point" actually be called the Reference LEVEL, and applied to the
 horizontal line (which also denotes, by coincidence, the horizontal axis of the graph) ?
 LookingGlass (talk) 21:30, 13 February 2008 (UTC)

In the literature it is described as "reference point", so no matter what may or may not be an appropriate name, that is what it is called (Daniel Kahneman and Amos Tversky (1979) via The Psychology of Judgment and Decision Making, 1993) 80.71.135.66 (talk) 18:07, 2 December 2010 (UTC)

The picture seems to be missing the loss aversion, which should be shown as a change in the slope at the reference point. Please see the original figure from Kahneman and Tversky (1979 p. 279). 88.114.88.64 (talk) 09:20, 10 December 2010 (UTC)

Template tag - Multiple issues

In my opinion the article lacks clarity as it doesn't align with wiki style guidelines. In these it is recommended that articles proceed from the general to the specific in such a way that the subject can be understood by a general non-specialist reader. As it is, the article lacks an adequate introduction, has no sections that expand on the introduction, or adequately explain its history and development, etc. Instead, the article quickly moves into a technical formula and brief explantion/description rather than any general introduction.

The article also has no in-line references/citations. Those references that are given are non-specific and so cannot be reasonably verified or tied to the text. The style of the article is not encyclopedic but rather colloqial and chatty, like a magazine article in my opinion.

LookingGlass (talk) 19:35, 13 December 2012 (UTC)

Introduction and figure wrong

"Losses hurt more than gains feel good (loss aversion). This differs greatly from expected utility theory, in which a rational agent is indifferent to the reference point. In expected utility theory, the individual only cares about absolute wealth, not relative wealth in any given situation."

This part is just wrong, nowhere in expected utility theory is defined how the utility function is shaped, loss aversion can be a part of it. — Preceding unsigned comment added by 141.44.202.15 (talk) 10:56, 28 November 2011 (UTC)

The figure is wrong: the curve has a kink at the origin. That's the whole point; see Fig. 3 in Daniel Kahneman; Amos Tversky Econometrica, Vol. 47, No. 2. (Mar., 1979), pp. 263-292. I do not know enough about prospect theory to fix this page, but enough to know that what's there right now misses an essential part of the approach.Nighster (talk) 15:19, 17 December 2012 (UTC)Nighster

Proposal to add a section that discusses policy applying prospect theory (loss aversion) within our educational system.

Prospect theory, specifically loss aversion has recently been tested by notable scholars and more recently by Dr. Roland Fryer and has shown positive behavior change of educators within the educational system. I would like to add a section showing other applications of prospect theory within this setting. I have been studying within the field of education and administration for the last 10 years and I hold a doctorate in Educational leadership and Administration from an accredited university in the U.S. I do not plan to add any independent research within this topic and will present my additions in a neutral and verifiable manner. Please let me know if there are any comments, suggestions, or objections to my intended addition. Fmerenda 19:57, 11 December 2012 (UTC) — Preceding unsigned comment added by Fmerenda (talk • contribs)

In the absence of any objections I will begin to add a section regarding the above research utilizing loss aversion from behavioral economics to illustrate a policy that relies upon a specifically framed merit pay intervention.Fmerenda 05:39, 12 December 2012 (UTC) — Preceding unsigned comment added by Fmerenda (talk • contribs)

Hi, firstly, if you do not have an account I suggest you get one and then sign any comments/posts/edits etc you make so that you can stay advised of responses etc. Regarding your proposal for adding a section it sounds to me that a simple note as to the application you refer to would suffice. I suggest that the aricle is about the theory itself rather than about any specific application or illustrations of it so any addition you wish to make should stay focused and on topic. An example of the way this could be done would be to use the research you refer to as a citation to substantiate the pertinent statements in the article as it stands. --LookingGlass (talk) 20:34, 12 December 2012 (UTC)

Hi, thank you for your feedback. I respectfully disagree however, I believe adding content to explain its application and using real-world examples should be more than a simple note. The article as it stands has a section entitled application, but does not provide any examples of its application. Additionally, reading the other comments, it seems many people do not fully understand prospect theory and providing examples of its application may assist with clarity. Thoughts? Fmerenda 00:54, 13 December 2012 (UTC) — Preceding unsigned comment added by Fmerenda (talk • contribs)

I apologise, you seem to have an account. Please sign your comments with four tilds "~" or by clicking on the pen icon in the menu bar of the comment box.

Regarding your proposals, an example should be subservient to that which it is an example of. The key is balance. As the article sets out: "Prospect theory is a behavioral economic theory that describes decisions between alternatives that involve risk, where the probabilities of outcomes are known". Your example is of its application in a particular field however it can be applied in any field.

In my opinion the cause of the article's lack of clarity is that the article doesn't align with wiki style guidelines. In these it is recommended that articles proceed from the general to the specific in such a way that the subject can be understood by a general non-specialist reader. As it is, the article lacks an adequate introduction, has no sections that expand on the introduction, or adequately explain its history and development, etc. Instead, the article quickly moves into a technical formula and brief explantion/description rather than any general introduction. The article also has no in-line references/citations. Those references that are given are non-specific and so cannot be reasonably verified or tied to the text. The style of the article is not encyclopedic but rather colloqial and chatty, like a magazine article in my opinion. If these matters were addressed any need to fill out the examples section would be significantly reduced.

Finally, I think that consideration should be given to either creating new articles, if the subject of the example is substantive, or of adding into other pertinent articles sections on the use of Prospect Theory in their topic.

LookingGlass (talk) 19:32, 13 December 2012 (UTC)

I agree that the article could be more aligned with the items you mentioned for clarity purposes, readability, and wiki style guidelines. Those issues need to be addressed. However, I still feel that giving real-world applications within any field will also help. It isn't the fact that it can be utilized in various manners/fields, but more importantly how it is used and the behavioral reasoning of why it works. By providing examples in Education and of course others can add other fields it has been applied to, may enable readers to put it all together. Thoughts? Fmerenda 04:16, 14 December 2012 (UTC) — Preceding unsigned comment added by Fmerenda (talk • contribs)

Fmerenda, you seem either to not understand or to disregard the two points I made, both of which regard wiki practice:

1. You continue to NOT to sign your comments.

2. "an example should be subservient to that which it is an example of". I see no purpose in reiterating an expansion of that.

--LookingGlass (talk) 06:10, 14 December 2012 (UTC)

I do respectfully disagree again, yet I do understand what you are stating. I do think the topic should be made clearer, but additionally an example of the topic is just as important, if not more to provide clarity for the readers. It doesn't have to be one or another.

You disagree and yet do not say with WHAT! I have NOT written that examples CANNOT provide clarity. LookingGlass (talk) 12:37, 15 December 2012 (UTC)

Not sure why when I sign the comments, it is not appearing that way all the time.

Sign your articles by clicking the icon (at the top) OR just type four tilds "~". Do ONLY one of these and you will have no problem. LookingGlass (talk) 12:37, 15 December 2012 (UTC)

Although I appreciate the comments of "LookingGlass", I would also appreciate others points of view as well, in order to make an informed decision regarding my addition and how the COMMUNITY feels about it. Fmerenda 16:07, 14 December 2012 (UTC) Fmerenda 16:07, 14 December 2012 (UTC) — Preceding unsigned comment added by Fmerenda (talk • contribs) Fmerenda 05:58, 15 December 2012 (UTC)

You ask for comment but do not address what is offered. What, exactly, are you seeking? LookingGlass (talk) 12:37, 15 December 2012 (UTC)

Hi:

I beleive I have addressed the comments thus far. Just because I don't agree with the comments made, doesn't mean I haven't addressed them and have not provided the reasons I don't agree. The article needs edits in many areas for clarity, I would like to address the clarity issue by providing real-world examples in a devoted section. Since it seems you want to address other areas of the article, and do not agree with my reasoning, I respectfully welcome comments and perspectives from others, so an informed decision can be made, based on how more than one member of the community feels. Fmerenda 22:14, 18 December 2012 (UTC) Fmerenda 22:14, 18 December 2012 (UTC) — Preceding unsigned comment added by Fmerenda (talk • contribs)

Badly worded sentence

"A little more in depth when looking at probability distortion is that..."

Did the writer mean to say, perhaps, "Looking more deeply at probability distortion, it means that..."

I'm not sure, or I would just re-write it myself. GeneCallahan (talk) 06:11, 13 May 2015 (UTC)

Examples

The table is a bit confusing: it would help if the settlement was specified instead of just "favorable" or "unfavorable". Now it looks as if one would prefer a 5% chance of winning money over a 95% chance of winning the same amount. I assume what is meant is something like:

• 95% chance to win $10,000. Fear of disappointment. RISK AVERSE. Accept $9,000 settlement
• 5% chance to win $10,000. Hope of large gain. RISK SEEKING. Reject $1,000 settlement
• 95% chance to lose $10,000. Hope to avoid loss. RISK SEEKING. Reject paying $9,000 settlement
• 5% chance to lose $10,000. Fear of large loss. RISK AVERSE. Accept paying $1,000 settlement Ssscienccce (talk) 06:35, 23 March 2014 (UTC)

I have to say that the example section is a pretty good illustration of how you can take a fairly simple concept and turn it into text even people who understand the theory will be confused by. The point in an example is to explain it to people who don't understand the theory (it's actually a very simple theory) not to throw excessive amounts of terminology at people. 82.26.17.69 (talk) 22:55, 4 January 2016 (UTC)

Dr. Schudy's comment on this article

Dr. Schudy has reviewed this Wikipedia page, and provided us with the following comments to improve its quality:

Comment on Figure

Just a tiny detail: In the figure it seems as if the value function is not convex in the loss domain (lower left part seems to become steeper again.

Comment on "Some behaviors observed in economics, like the disposition effect or the reversing of risk aversion/risk seeking in case of gains or losses (termed the reflection effect), can also be explained by referring to the prospect theory."

There is a strong debate under which conditions prospect theory can explain the disposition effect (see e.g. Barberis and Xiong, 2009; Henderson, 2012; Hens and Vlcek, 2011; Kaustia, 2010 for a discussion). Further, recent experimental evidence suggests that the disposition effect cannot fully be explained by prospect theory but rather by a combination of time-insconsistent behavior with some utility models which can generate a reluctance to realize assets trading at a loss (such as prospect theory or realization utility) (see Fischbacher, Hoffmann and Schudy, 2015).

Barberis, N., Xiong, W., 2009. What Drives the Disposition Effect? An Analysis of a Long‐Standing Preference‐Based Explanation. The Journal of Finance, 64(2), 751-784.

Fischbacher, U., Hoffmann, G. and Schudy, S., 2015. The causal effect of stop-loss and take-gain orders on the disposition effect. TWI Research Paper available at: http://www.twi-kreuzlingen.ch/uploads/tx_cal/media/TWI-RPS-089-Fischbacher-Hoffmann-Schudy.pdf

Henderson, V., 2012. Prospect theory, liquidation, and the disposition effect. Management Science, 58(2), 445-460.

Hens, T., Vlcek, M., 2011. Does prospect theory explain the disposition effect? Journal of Behavioral Finance, 12(3), 141-157.

Kaustia, M., 2010. Prospect theory and the disposition effect. Journal of Financial and Quantitative Analysis, 45(03), 791-812.

We hope Wikipedians on this talk page can take advantage of these comments and improve the quality of the article accordingly.

Dr. Schudy has published scholarly research which seems to be relevant to this Wikipedia article:

• Reference : Urs Fischbacher & Gerson Hoffmann & Simeon Schudy, 2014. "The causal effect of stop-loss and take-gain orders on the disposition effect," TWI Research Paper Series 89, Thurgauer Wirtschaftsinstitut, Universitat Konstanz.

ExpertIdeasBot (talk) 18:50, 27 June 2016 (UTC)

Dr. Krawczyk's comment on this article

Dr. Krawczyk has reviewed this Wikipedia page, and provided us with the following comments to improve its quality:

The term "prospect theory" is often applied to the cumulative version or both. Given that this entry is on the classic version only, this should be emphasised early on.

"in its simplest form" is unclear. The picture is misleading, because the value function is smooth at 0, whereas loss aversion would mean that the slope is greater for losses than gains close to zero -- a point of discontinuity. "This differs from expected utility theory, in which a rational agent is indifferent to the reference point." -- this sentence does not make much sense, for more than one reason. There is no such notion as "reference point" in the EUT. An agent is "indifferent to the reference point" (if I understand this strange expression correctly) also under prospect theory. "the first equation" -- it is not clear which one is meant here. "υ()" is not defined. Shouldn't it be v()? "The value function is thus defined on deviations from the reference point, generally concave for gains and commonly convex for losses and steeper for losses than for gains." -- why this is discussed at this point? It is mentioned when the value function is introduced and that is enough. "The comparison between ... If we set the frame..." -- it is not clear what these two paragraphs are supposed to illustrate if predictions can be the same. "The digital age has brought the implementation of prospect theory in software" -- not sure what the authors mean.

"the excess returns puzzle and long swings/PPP puzzle of exchange rates through the endogenous prospect theory of Imperfect Knowledge Economics, " -- is this a "situation"??

We hope Wikipedians on this talk page can take advantage of these comments and improve the quality of the article accordingly.

We believe Dr. Krawczyk has expertise on the topic of this article, since he has published relevant scholarly research:

• Reference : Micha Krawczyk, 2014. "Probability weighting in different domains: the role of stakes, fungibility, and affect," Working Papers 2014-15, Faculty of Economic Sciences, University of Warsaw.

ExpertIdeasBot (talk) 00:32, 30 September 2016 (UTC)

Dr. Dhami's comment on this article

Dr. Dhami has reviewed this Wikipedia page, and provided us with the following comments to improve its quality:

This article does not even remotely do any justice to prospect theory. This is a very incomplete and limited account of prospect theory. It will serve more to confuse than enlighten. The original articles by Kahneman and Tversky (in the further reading section of the article) are very enlightening. For a clear and comprehensive treatment of prospect theory, see:

Sanjit Dhami (2016) Foundations of Behavioral Economic Analysis. Oxford University Press. To be published by mid October 2016. Here is another excellent must-read source to gain understanding of prospect theory: Kahneman, D., and Tversky, A. (2000). Choices, Values and Frames. Cambridge: Cambridge University Press.

Here are some comments on the individual sections:

1. Section titled "Model": A variety of technical terms are introduced in describing the editing phase in prospect theory--these terms will be unknown to most readers. The following sentence is incorrect: "This differs from expected utility theory, in which a rational agent is indifferent to the reference point." 2. Section titled "Example": The section jumps directly into "fourfold classification of risk". The previous section titled "Model" refers to the 1979 version of the model (better called as original prospect theory) and the fourfold classification refers to the 1992 version of the model (based on Tversky and Kahneman, JRU, 1992: cited in further reading). The 1992 version is known as cumulative prospect theory (and typically just called prospect theory). There is no way someone can understand this material unless it clarified that under prospect theory, risk attitudes are jointly determined by the shapes of the probability weighting function and the shape of the utility function. 3. Section titled "Applications": This is disappointing. It should account for 40% of the article. The applications are very rich, varied, and cover the entire field of economics. All this is covered in: Sanjit Dhami (2016) Foundations of Behavioral Economic Analysis. Oxford University Press. To be published by mid October 2016.

Kahneman, D., and Tversky, A. (2000). Choices, Values and Frames. Cambridge: Cambridge University Press.

We hope Wikipedians on this talk page can take advantage of these comments and improve the quality of the article accordingly.

We believe Dr. Dhami has expertise on the topic of this article, since he has published relevant scholarly research:

• Reference 1: Sanjit Dhami & Ali al-Nowaihi, 2010. "The Behavioral Economics of Crime and Punishment," Discussion Papers in Economics 10/14, Department of Economics, University of Leicester, revised Jul 2010.

• Reference 2: Ali al-Nowaihi & Sanjit Dhami, 2008. "A value function that explains the magnitude and sign effects," Discussion Papers in Economics 08/31, Department of Economics, University of Leicester.

ExpertIdeasBot (talk) 02:05, 2 October 2016 (UTC)

examples - ii

"The interplay of overweighting of small probabilities and concavity-convexity of the value function leads to the so-called fourfold pattern of risk attitudes: risk-averse behavior when gains have moderate probabilities or losses have small probabilities; risk-seeking behavior when losses have moderate probabilities or gains have small probabilities. "

this sentence uses "when" by which it makes the layman believe that it describes a causal connection, eg: the risk seeking behavior emerges because there is a small probability of winning. which is utterly wrong, since the choice is influenced by the marginally large sum of possible winnings, even though the chance to win is small, and not because the chance is small. please rephrase it so it clarifies the meaning instead of obfuscating it. 89.134.199.32 (talk) 22:05, 10 November 2018 (UTC).