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The cost or payoff
The cost or payoff is not always clear.
For example, people feel more pain from the loss of a dollar than pleasure from a dollar gained. It is called loss aversion.
The prospect theory combines the ideas of loss aversion and over- and under-weighing the odds. It helps to calculate the real expected value.
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We all spend time making decisions with some risk involved. We look at each situation and consider the likelihood that something will happen as well as if it would be worth it.
For example, whether to sprint across the street when the sign says “don’t walk.”
Expected valu...
Part of the expected value is estimating the chance or probability of the situation.
Many people have poor judgement calculating real probabilities. They overstate the chance of rare events and underestimate the possibility of common events.
For example, many peo...
Risk is part of our lives and cannot always be avoided. We have to cross streets or drive in cars.
When we are faced with a risky situation, we can make a better choice when we consider the odds as well as the payoff.
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We surround ourselves with it: We tend to like people who think like us; if we agree with someone's beliefs, we're more likely to be friends with them.
This makes sense, but it means that we subconsciously begin to ignore or dismiss anything that threatens our world views
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Behavioral economists show that when humans make quick decisions under pressure, it is based mostly on intuition. They are unconsciously guided by biases and psychological fallacies.
The nudge theory suggests making subtle interventions to nudge people to make certain choi...
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A common occurrence of heuristics in which we use an initial starting point as an anchor that is then adjusted to yield a final estimate or value.
Example: estimating the value of an object based on the common price of similar objects.
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