Researchers suggest that we consider what when making a decision? Utility and probability Utility and function Function and ability Cost and probability

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Jolee

English

9 September, 22:50

Researchers suggest that we consider what when making a decision? Utility and probability Utility and function Function and ability Cost and probability

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Keira Roman · Answer 1

The correct answer is the first option given: utility and probability.

The prospect theory, developed by Daniel Kahneman and Amos Tversky in 1992, states that people, when making a decision, tend to analyze utility (the value that the possible decision will have in the future) and the probabilities of its happening.

An example would be as follows: if a person is offered a 100% chance of winning 50 dollars and an 80% chance of winning 100 dollars, in most cases, the person would choose the 50-dollar chance. Even though it represents a smaller gain, its probability is more tempting since it's a sure 100% chance of happening. In this example, the most valuable decision is the one that offers more certainty.

Another aspect of the utility vs. probability analysis is the fact that people tend to "ignore" small probabilities. That means: if the gain is high, and the probability of losing everything that was invested seems really low (for instance, 10%), people tend to take the risk. The chance of losing it all does exist, but people choose to ignore it when facing lucrative gains.