Economics Prospect Theory Questions
Diminishing sensitivity in Prospect Theory refers to the idea that individuals' sensitivity to changes in wealth or outcomes diminishes as the magnitude of those changes increases. According to Prospect Theory, individuals tend to be more sensitive to small changes in wealth or outcomes, but as the changes become larger, the sensitivity decreases. This means that individuals perceive and evaluate gains and losses differently depending on the reference point or initial wealth level. As a result, individuals may be more risk-averse when facing gains and more risk-seeking when facing losses, as the perceived value of additional gains diminishes and the perceived pain of additional losses decreases.