Economics Prospect Theory Questions
In Prospect Theory, the concept of reference point refers to a psychological benchmark or point of comparison that individuals use to evaluate potential gains or losses. It serves as a reference against which individuals assess the desirability or utility of different outcomes. The reference point can vary depending on the individual's circumstances, experiences, and expectations. Prospect Theory suggests that individuals tend to evaluate gains and losses relative to this reference point, and their decision-making is influenced by the perceived deviations from this point rather than the absolute outcomes. This means that individuals may perceive gains and losses differently depending on whether they are above or below their reference point, leading to risk-seeking behavior when facing potential losses and risk-averse behavior when facing potential gains.