On risk seeking and risk averse behaviour
Kahneman & Tversky (1979,1992) studied the risk seeking and risk averse behaviour in a simple two choice experiment. The participants were asked to choose between two choice, a certain gain of 5 pound and 1/1000 chance of gaining 5000 pound or 999/1000 chance of gaining nothing. Do notice that the utility of both choices are the same, u(5 pound)= 0.001 u(5000 pound). If the participants were rational in the sense that they maximizes utility, there should be no difference in number of participant for the choices. However, most of the participants chose the second option. Their choice were against normative theory as they were willing to take risk to gain more money. In another part of the experiment, the participants were ask to choose between two choice, a certain loss of 5 pound and 1/1000 chance of losing 5000 poung or 999/1000 chance of losing nothing. Again, the utility of both choices are the same. Most of the participants chose the first option. Their choice were against normative theory as well as they were willing to suffer a certain small loss compared to small chance of losing big. It seems that the big loss overrides the high chances of not losing anything.
-To Be Continue-
Kahneman & Tversky (1979,1992) studied the risk seeking and risk averse behaviour in a simple two choice experiment. The participants were asked to choose between two choice, a certain gain of 5 pound and 1/1000 chance of gaining 5000 pound or 999/1000 chance of gaining nothing. Do notice that the utility of both choices are the same, u(5 pound)= 0.001 u(5000 pound). If the participants were rational in the sense that they maximizes utility, there should be no difference in number of participant for the choices. However, most of the participants chose the second option. Their choice were against normative theory as they were willing to take risk to gain more money. In another part of the experiment, the participants were ask to choose between two choice, a certain loss of 5 pound and 1/1000 chance of losing 5000 poung or 999/1000 chance of losing nothing. Again, the utility of both choices are the same. Most of the participants chose the first option. Their choice were against normative theory as well as they were willing to suffer a certain small loss compared to small chance of losing big. It seems that the big loss overrides the high chances of not losing anything.
-To Be Continue-
