Prospect theory explains risk aversion from "summary" of Thinking, Fast and Slow... in 30 Minutes by 30 Minute Expert Summary Staff
When faced with decisions involving risk, people tend to exhibit risk aversion, preferring certainty over uncertainty. Traditional economic theory suggests that individuals make rational decisions by weighing the probabilities and potential outcomes of each option. However, Prospect Theory challenges this notion by proposing that people do not evaluate probabilities objectively; instead, they rely on subjective assessments based on perceived gains and losses. According to Prospect Theory, individuals are more sensitive to losses than gains, a phenomenon known as loss aversion. The fear of losing something valuable often outweighs the potential benefits of taking a risk. As a result, people tend to avoid risky choices that could lead to losses, even if the expected value suggests a positive outcome. This preference for avoiding losses influences decision-making and contributes t...
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