Question

Explain how the Prospect Theory explanation of purchase behavior (with respect to prices) differs from the conventional economist presentation of buying behavior.

Answer 1

Prospect theory of purchase behavior explains that, Consumer while buying any product or service will compare both the gain and losses which can occur in nearby future and choose the product having more probability of gain.

Lets understand with an example.

Consider a person named Rahul want to invest in SIP to get more returns after 10 years.

He has two options

1. ABC company

2. XYZ Company

ABC company agent is saying we give 10% fixed annual interest rate to our holders irrespective of the market condition.

XYZ company agent is saying that , we give 12% annual interest rate in accordance with the market condition but in last 3 years it got decreased to 9%.

So, here Customer will choose the ABC company , as there is more chances of gain.

While

Conventional  Buying behavior differs totally with the prospect theory as conventional buying behaviors considers various aspects during buying. there are as follows:

*Cost of the product

* lifespan

* Risk Involved with the usage

* Depression rate

* Resale Value

* Reliability etc