Economics Prospect Theory Questions
Mental accounting in Prospect Theory refers to the tendency of individuals to categorize and evaluate economic outcomes based on subjective mental categories rather than objective financial considerations. It suggests that people create separate mental accounts for different types of financial transactions or investments, and they evaluate each account independently. This leads to irrational decision-making, as individuals may prioritize certain accounts over others, even if it is not financially optimal. For example, individuals may be more willing to take risks with money won from gambling (considered as "extra" or "free" money) rather than with their regular income. Mental accounting can influence risk-taking behavior and affect how individuals perceive gains and losses, ultimately impacting their decision-making in economic situations.