Download file to see previous pages...
Standard expected utility theory represents preference over risky objects, by weighted average of utility assigned to each possible outcome, where the weights are the probability of each outcome (Expected Utility Theory, 2008). This theory analyses all the risk factors before taking decisions. For example, investments in share markets may yield a good return or a big loss. But investments in term deposits may guarantee a fixed return. Thus many of the investors opt for the investments in term deposits in order to avoid risks in investing in share markets. Prospect theory on the other hand analyses decisions among alternatives which involve risks. “Under prospect theory, value is assigned to gains and losses rather than to final assets; also probabilities are replaced by decision weights” (Prospect Theory, n. d). For example, investments in share market and mutual funds involve risks. But compared to share market investment, mutual fund investment are safer. Prospect theory thus helps people to take proper decisions among the risky alternatives available. This paper compares and contrast Standard expected utility theory and prospect theory.
Sebora (1995) has mentioned that expected utility theory suggests that choices should be made by weighing the outcomes (gains or losses) of actions by their probabilities and the alternative which has the maximum utility should be selected. Prospect theory, on the other hand, indicates that, decision makers prefer to simplify their choices cognitively whenever possible, satisfying rather than maximizing (Sebora, 1995, p.4). Gain or losses is given more emphasise in expected utility theory. Big gains expected with high risks will be given least preferences compared to small gains with least risks according to the expected utility theory. For example, consider a person with the choices of getting an excellent salaried job with high risk and a moderately salaried job with low
...Download file to see next pagesRead More
How people make choices remains one of the most complex and controversial issues of economic and probabilistic analysis. Dozens of theories were developed to explain the rational and emotional underpinnings of making choices. The problem is in that a whole set of factors and elements influence the process of making choices.
Modernization theory is the byproduct of three historical event of post world war. The modernization theory can be described as the change of traditional society of the previous age to the modern age of the present. It gives emphasis on the development of the social scenario of the society.
Under normal circumstances, an individual is attentive as well as responsive towards any panic condition. Under the condition of panic disorder, such consciousness occurs without any reason and when the situation is not provoked, which is observed as a serious co-morbid illness
It also entails a thorough look at individual differences (Butt, 2004). This is the study of people’s uniqueness (Butt, 2004). There is an argument that when put different people are put in different environments they tend to behave differently. People are inherently unique and respond differently to similar circumstances.
It is a deterministic theory, in that it suggests that humans develop along lines that are not necessarily logical or rational. Additionally, there are several different terms that refer to life stages present in Freud’s original psychoanalytic theory, although these have definitely evolved.
Capitalism was doomed to destruction because of internal tensions and contradictions. He believed that communism would eventually replace capitalism with a classless society ruled by the dictatorship of the proletariat.
His theory of modern domination
Utility is defined as the amount of satisfaction a consumer derives from consuming a unit of a good or service, in the study of utility is measured in two ways namely cardinal utility and ordinal utility, cardinal utility involves assigning utils which is a measure of the level of utility, for example, the utility derived from consuming a unit of good X is 4 utils and utility derived from consuming good Y is 5 utils.
Traditionally, utility theory has been accepted as normal consequence of logical assumptions, and more broadly has been accepted as explanation of economic approach. Kahneman and Tversky (1979) in their article “Prospect Theory: An Analysis
According to the discussion the dependency theory refers to the model explaining the notion of flow of resources. According to this theory, resources flow from the boundary or the periphery of the undeveloped and poor countries to the centre of the economically stable or the wealthy states enriching the developed countries.
10 Pages(2500 words)Essay
GOT A TRICKY QUESTION? RECEIVE AN ANSWER FROM STUDENTS LIKE YOU!
Let us find you another Essay on topic Compare and contrast standard Expected Utility theory and Prospect theory for FREE!