The Negotiator Magazine

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In their research on framing Kahnerman and Tversky developed a theory on why people make conservative or risky decisions. According to this theory, which they termed prospect theory, people were more influenced in their decision-making by the prospect of a loss than by the prospect of an equivalent gain. Subsequent research clearly demonstrated that humans do not weigh losses and gains logically, but rather tend to choose options with the highest subjective value, irrespective of whether these options deliver the highest objective gain.

If a perfect match existed between the real gain and the psychological experience of a person picking up a 100 note, this person should be five times as happy as someone picking up a 20 note. The opposite then naturally also should be true for a person losing money. If this logical relationship were to be plotted on a vertical axis (happiness at the upper end and unhappiness at the lower end) and a horizontal axis (loss on the left and gain on the right) the following graph would emerge:

If judgements were always logical there should be a perfect correlation between the increase in good fortune and the increase in happiness (see Fig. 1). This is, however, not the case. Finding a 1 coin is inclined to result in a degree of happiness that is not exactly replicated when additional 1coins are found. Although each additional coin undoubtedly generates happiness, the extent of that happiness decreases for each additional coin found.

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October 2004