Question

1. Kahneman and Tversky (1984) observe that risk seeking is prevalent when people must choose between a sure loss and a substantial probability of larger loss (and some probability of smaller loss).

   Briefly explain how their VALUE function explains the phenomenon

Answer 1

Answer:

Value Function Theory by Kahneman and Tversky (1984)

Value function theory expect that misfortunes and gains are esteemed in an unexpected way, and therefore people make decisions dependent on recognized gains rather than apparent misfortunes. Otherwise called the "loss-aversion" hypothesis, the general idea is that if two decisions are put before an individual, both equivalent, with one introduced as far as likely gains and the other as far as potential misfortunes, the previous alternative will be chosen.The fundamental clarification for a person's conduct, under value function theory, is that on the grounds that the decisions are autonomous and solitary, the probability of a gain or a misfortune is sensibly accepted as being 50/50 rather than the probability that is really introduced. Basically, the probability of a gain is commonly seen as more prominent. In spite of the fact that there is no distinction in the genuine gains or misfortunes of a specific item, the value function theory says speculators will pick the item that offers the most recognized gains. Tversky and Kahneman recommended that misfortunes cause a more noteworthy enthusiastic effect on a person than does a comparable amount of gain,

so given decisions introduced two different ways :-

• with both contribution a similar outcome
• an individual will pick the alternative contribution recognized gains.

For instance, accept that the final result is getting $25. One choice is being given the straight $25. The other alternative is gaining $50 and losing $25. The utility of the $25 is actually the equivalent in the two alternatives. Notwithstanding, people are well on the way to decide to get straight money on the grounds that a solitary gain is commonly seen as more good than at first having more money and afterward enduring a misfortune.

As per Tversky and Kahneman, the assurance impact is shown when individuals incline toward specific results and underweight results that are just plausible. The assurance impact prompts people keeping away from risk when there is a possibility of a definite gain. It likewise contributes to people looking for chance when one of their alternatives is a certain misfortune. The isolation impact happens when individuals have given two alternatives a similar result, however various courses to the result or outcome. For this situation, individuals are probably going to cancel out comparative data to relieve the psychological or cognitive burden, and their decisions will change contingent upon how the alternatives are framed.