In the field of psychology applied to economic behavior the figure of Daniel Kahneman stands outAn American-Israeli author of the book focused on the determinants of decision making in situations where profits 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 bounded rationality, in which he questions the idea that the human being is fundamentally rational.
In this article we will examine the perspective theory of Kahneman and his regular collaborator, Amos Tversky. This model is one of the main developments of the classical concept of expected subjective utility, very relevant in economics and psychology.
Biography and work of Daniel Kahneman
Daniel Kahneman was born in 1934 in Tel Aviv, although he grew up in France during WWII. Later, his family moved to Palestine. From his childhood and youth, Kahneman highlights the relevance of human interaction and complexity in Jewish culture and his own interest in existentialism as key 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. It would later become key figure in the study of human judgment, behavioral economics and hedonistic psychology, A side of positive psychology that focuses on the analysis of pleasure and the aspects that promote or hinder it.
In 2002, Kahneman won the Nobel Prize in economics in recognition of the multiple contributions to this field that have been made by psychology in collaboration with the late Amos Tversky. His work on decision-making under conditions of uncertainty was particularly noted. 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, which is 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 perspective theory
Kahneman and Tversky’s Foresight Theory, also known as the Outlook or Loss Aversion Theory, develops the Expected Utility Hypothesis, a concept in economic game theory that states that people we choose the alternative that we consider the most useful among those available to deal with a specific situation.
According to the theory of prospects, in case of uncertainty about the results we tend to go for safe rewards over less likely rewards, Although the value of the first is lower.
In addition, we place more importance on reducing losses, although not likely, than on moderating gains; the authors call this “loss aversion”. Due to our aversion to losses, in the event that we are presented with two equivalent alternatives, one of which is formulated in terms of gains and another of losses, we prefer to avoid the second. In short, we prefer to avoid losses by making a profit.
So, for example, if two financial advisers suggest that we invest in the same stocks but the first shows that they have a moderate average return and the second that their profit ratio has decreased in recent years, we would prefer the offer from the first advisor.
Kahneman and Tversky stated that the prospect of loss has a greater emotional impact than the prospect of gain and that we tend to perceive the probability of harm as if it is 50/50, whether or not it is much lower.
Besides the concept of loss aversion that we have already seen, outlook theory offers two other fundamental aspects: assessment against a benchmark and varying sensitivity.
The reference point is widely identified by the average expectation of a given benefit or cost. This benchmark can be a sum of money, such as the usual price of a good or the salary we receive each month, or any other quantitative indicator.
The concept of variable sensitivity refers to the fact that our sensitivity to losses decreases as the reference point increases. For example, if a kilo of tomatoes costs 60 cents in a store on our street and 50 in another at 15 minutes, we will probably choose to buy in the second, but we will not make the same effort to save 10 cents. when purchasing a device.
Applications of this model
The theory of perspectives 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 high paying job than this. that he already has. would involve a change of address and lifestyle.
Likewise, Kahneman’s theory justifies the so-called endowment effectThis allows people to place more value on what they objectively value certain things for for emotional reasons. Following the example above, it is possible that a person will choose to continue living in their current city because most of their relatives reside there.