Question

500 words pleasee!!!

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

Answer 1

Consumer ouying behavior has long been of interest to researchers. Early economists, led by Nicholas Bernoulli, John von Neumann and Oskar Morgenstern, started to investigate the basis for consumer decision-making about 300 years ago. This early research approached the topic from an economic viewpoint, concentrating exclusively on the purchasing act. From this viewpoint, the most prevalent model is 'Utility Theory,' which recommends consumers to make choices based on the predicted consequences of their decisions. Consumers are seen as rational decision-makers who are concerned only with self-interest. Where utility theory views the consumer as a 'rational economic individual', contemporary consumer behavior research considers a broad range of factors affecting the consumer and recognizes a wide range of non-purchasing consumer behaviors. These activities typically include: need recognition, information search, evaluation of alternatives, the building of purchase intention, the act of purchasing, consumption and finally disposal. Over the last century, this more holistic understanding of consumer behavior has evolved through a variety of discernible steps, taking into account new research methodologies and paradigmatic approaches.

The Prospect theory, on the other hand, suggests a disparity between losses and advantages and that decisions are made on the basis of perceived gains instead of perceived losses. This theory was proposed in 1979 and further developed in 1992 by Amos Tversky and Daniel Kahneman, considering how decisions are made psychologically more accurate than the predicted theory of utility. Also known as the "loss-aversion" principle, the general idea is that if two options are put before a person, both equivalent, the one offered in terms of potential gains and the other in terms of possible losses, the former option will be selected. In other words, while the real profits or losses of a certain product do not vary, the prospect principle implies that investors are to choose the product that provides the most expected benefits.

For Example: Imagine an investor being given a presentation by two different financial advisors for the same mutual fund. One advisor introduces the fund to the client, stressing that for the past three years it has an average return of 12 percent. The other advisor advises the investor that in the last 10 years the fund has had above-average returns, although it has been through or declining in recent years. Prospect theory suggests that if the investor was approached with the very same mutual fund, he is likely to buy the fund from the first advisor, who represented the rate of return of the fund as a net benefit rather than the advisor describing the fund as having high returns and losses.

The fundamental explanation for the actions of a person, according to prospect theory, is that, since the options are independent and discrete, the likelihood of gain or loss is logically believed to be 50/50 instead of the likelihood that is actually provided. Essentially, the likelihood of a gain is usually considered to be higher. The theory of prospect helps to understand promotional price efficiency. Price cuts are generally seen as a gain for consumers compared to a normal price, as benefits stay the same when purchasing prices are reduced.