In the field of psychology applied to economic behavior highlights the figure of Daniel Kahneman an American-Israeli author whose work has focused on the determinants of decision making in situations where benefits and losses are uncertain.
This psychologist, in addition to being one of the few to have won a Nobel Prize, is known for his research on limited rationality, in which he questions the idea that human beings are fundamentally rational.
In this article We will see the perspective theory of Kahneman and his frequent collaborator, Amos Tversky This model represents one of the main developments of the classic concept of expected subjective utility, very relevant in economics and psychology.
Daniel Kahneman was born in 1934 in Tel Aviv, although he grew up in France around the time of World War II. Later his family moved to Palestine. Of his childhood and youth, Kahneman highlights the relevance of human interaction and complexity in Jewish culture and his own interest in existentialism as fundamental factors in his decision to become a psychologist.
In 1961 he received his doctorate in Psychology from the University of Berkeley, California, where he also studied mathematics. Later she would become a key figure in the study of human judgment, in behavioral economics and in hedonistic psychology a branch of positive psychology that focuses on the analysis of pleasure and the aspects that favor or harm it.
In 2002 Kahneman won the Nobel Prize in Economics in recognition of the multiple contributions to this field that he has made from psychology in collaboration with the late Amos Tversky. His work on decision-making under conditions of uncertainty was especially highlighted. He has also received awards from the American Psychological Association and the Society of Experimental Psychologists, among others.
Kahneman is currently professor emeritus and senior fellow at the Woodrow Wilson School of Public and International Affairs, part of Princeton University in New Jersey. He is also an honorary member of the universities of Berkeley and British Columbia, as well as the Hebrew University of Jerusalem and other institutions.
Kahneman and Tversky’s prospect theory
Kahneman and Tversky’s prospect theory, also known as prospect theory or loss aversion, develops the expected utility hypothesis, a concept from economic game theory that states that people We choose the alternative that we consider most useful from among those available to face a specific situation.
According to prospect theory, when there is uncertainty regarding the results We tend to opt for sure rewards over less likely ones although the value of the former is lower.
Furthermore, we give more importance to small losses, even if they are improbable, than to moderate gains; The authors call this “loss aversion.” Due to our aversion to losses, if we are presented with two equivalent alternatives of which one is formulated in terms of gains and the other in terms of losses, we will most likely choose to avoid the second. In short, we would rather avoid losses than make profits.
Thus, for example, if two financial advisors offer us to invest in the same shares but the first highlights that they have a moderate average profitability and the second that their profit ratio has decreased in recent years, we will prefer the first advisor’s offer.
Kahneman and Tversky stated that the prospect of losses has a greater emotional impact than that of gains and that we tend to perceive the probability of harm as if it were 50/50, regardless of the fact that it is much lower.
Main concepts
In addition to the concept of loss aversion that we have already seen, prospect theory provides two other fundamental aspects: evaluation relative to a reference point and variable sensitivity
The reference point is broadly identified with the average expectation regarding a given benefit or cost This reference point can be an amount of money, such as the usual price of a good or the salary we earn each month, or any other quantitative indicator.
The concept of variable sensitivity refers to the fact that our sensitivity to losses decreases as the set point increases For example, if a kilo of tomatoes costs 60 cents in a store on our street and 50 in another that is 15 minutes away, we will probably choose to buy in the second, but we will not make the same effort to save 10 cents on the purchase. of an appliance.
Applications of this model
Prospect theory It is frequently applied to the economic behavior of people It is useful for predicting behavior in areas such as organizational psychology, gaming, and economics itself.
This model explains different psychological effects, such as the “status quo”. In economics, this term refers to the fact that people often prefer to maintain the current state if we are offered alternatives that do not give us greater satisfaction, as happens when someone rejects a better-paid job than the one they already have to accept. It would involve a change of address and lifestyle.
Likewise, Kahneman’s theory justifies the so-called endowment effect, which makes people give greater value than they objectively have to some things for emotional reasons. Following the previous example, it is possible that someone chooses to continue living in their current city because most of their loved ones reside there.
