Economics Prospect Theory Questions
In Prospect Theory, the difference between gains and losses lies in how individuals perceive and react to them. Gains refer to positive outcomes or improvements in one's current situation, while losses refer to negative outcomes or deteriorations in one's current situation.
However, the key distinction in Prospect Theory is that individuals tend to be more sensitive to losses than gains. This means that the psychological impact of a loss is typically greater than the psychological impact of an equivalent gain. Individuals often exhibit risk-averse behavior when faced with potential losses, seeking to avoid or minimize them. On the other hand, individuals may exhibit risk-seeking behavior when faced with potential gains, aiming to maximize or increase them.
Overall, Prospect Theory suggests that individuals' decision-making is influenced by their subjective evaluation of gains and losses, with losses having a stronger impact on their choices and behavior.