Prospect theory shows risk attitudes shift with gain or loss framing

Evidence

The weakening of standard views of rational economic actors is currently prominent in “behavioral finance,” which portrays investors as prone to systematic biases.2” For instance, the “prospect theory” put forward by Daniel Kahneman and Amos Tversky (1979) points to the way in which attitudes to a risky decision are affected by how the decision is framed in relation to subjectively important reference points. When psychologists confront experimental subjects with risky decisions, those subjects are typically risk averse with respect to perceived gains, but risk seeking with respect to what are seen as losses. They are prepared to “gamble” to recoup a perceived loss, but are less willing to endanger gains. — Donald MacKenzie, An Engine, Not a Camera, 1199

Categorization

• DEFINE: Defines prospect theory and the reference-point framing effect — core behavioral finance terminology.
• XREF: connects to: Upper-middle-class risk-taking is a defensive response to falling behind the top 2% — Neil Fligstein & Adam Goldstein, The Emergence of a Finance Culture in…, 145; Risk attitude determines how an investment’s value differs from its expected payoff — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 534; Traders’ risk behavior hinges on anticipated bonus reference points — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 1200 (+3 more)

Broader Connections

• Framing a decision shifts the reference point and thereby changes risk preference #expands (0.95) — John T. Jost and Jim Sidanius, Political Psychology, 2415
• People are risk-averse in gains but risk-seeking in losses #expands (0.90) — John T. Jost and Jim Sidanius, Political Psychology, 2406
• Framing equivalent policy goals as loss-removal boosts support over gain-framing #exemplifies (0.90)