What do the findings of prospect theory tell you about people’s reasoning to play lottery?

According to prospect theory, some people participate in lottery play because they largely overweight their small chances of winning. However, also this theory cannot explain widespread gambling because most lottery participants have quite rational expectations regarding the outcome of a draw (Forrest et al. 2000).

What does prospect theory explain?

The prospect theory says that investors value gains and losses differently, placing more weight on perceived gains versus perceived losses. … The prospect theory is part of behavioral economics, suggesting investors chose perceived gains because losses cause a greater emotional impact.

How does prospect theory affect decision making?

Prospect theory states that decision-making depends on choosing among options that may themselves rest on biased judgments. Thus, it built on earlier work conducted by Kahneman and Tversky on judgmental heuristics and the biases that can accompany assessments of frequency and probability.

How does framing affect decision making?

When making decisions, people will be influenced by the different semantic descriptions of the same issue, and have different risk preferences, which is called the framing effect indicating that people make decisions based on the potential value of losses and gains rather than the final outcome.

What is the utility theory?

Utility theory. bases its beliefs upon individuals’ preferences. It is a theory postulated in economics to explain behavior of individuals based on the premise people can consistently rank order their choices depending upon their preferences. … that seeks to explain the individuals’ observed behavior and choices.

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How do users make decisions?

“People make decisions based on the potential value of losses and gains rather than the final outcome.” … According to Kahneman and Tversky, losses and gains are valued differently, and thus users make decisions based on perceived gains instead of perceived losses.

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