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PROSPECT THEORY: LOSSES ALWAYS LOOM LARGER THAN POTENTIAL GAINS
  • The first priority is not to lose - humans are loss averse.
  • Gains are secondary to not losing.
  • Framing a decision in terms of possible loss motivates a person more strongly than framing it in terms of possible gain.

Because losses appear larger than gains, humans tend to adopt conservative strategies when confronted with a positively framed problem, and risky strategies when confronted with a negatively framed problem. To demonstrate this Khanerman and Tversky asked a representative sample of physicians to respond to the following question:

"Imagine that the U.S. is preparing for an outbreak of an unusual Asian disease, which is expected to kill 600 people. Two alternative programs to cot the disease have been proposed. Assume that the exact scientific estimate of the consequences of the programs areas follows: If program A is adopted, 200 people will be saved. If program B is adopted, there is a one-third probability that no people will be saved and a two-thirds probability that that all people will be saved. Which of the two programs would you favour?

Given that the problem was positively framed, 72% of the physicians opted for program A, the safe and certain strategy, and only 28% for program B, the risky strategy.

Simultaneous to asking the first group of physicians to respond to the positively framed problem, they also asked and equivalent group to respond to the same problem that had been negatively framed.

"Imagine that the U.S. is preparing for an outbreak of an unusual Asian disease, which is expected to kill 600 people. Two alternative programs to cot the disease have been proposed. Assume that the exact scientific estimate of the consequences of the programs areas follows: If program C is adopted, 400 people will die. If program D is adopted, there is a one-third probability that nobody will die and a two-thirds probability that 600 people will die. Which of the two programs would you favour?

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October 2004