StudentShare solutions
Triangle menu

Compare and contrast standard Expected Utility theory and Prospect theory - Essay Example

Nobody downloaded yet

Extract of sample
Compare and contrast standard Expected Utility theory and Prospect theory

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 ...Show more

Summary

Decisions can make or break an organization. Logical and timely decisions are always beneficial to the company whereas decisions without proper analysis will always a burden to the company…
Author : madalinehirthe
Compare and contrast standard Expected Utility theory and Prospect theory essay example
Read Text Preview
Save Your Time for More Important Things
Let us write or edit the essay on your topic
"Compare and contrast standard Expected Utility theory and Prospect theory"
with a personal 20% discount.
Grab the best paper

Check these samples - they also fit your topic

Is Expected Utility a good theory for explaining how people make choices
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.
10 pages (2500 words) Essay
Compare and contrast two of the following theories of social development: Modernisation theory Dependency theory World systems t
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.
8 pages (2000 words) Essay
Compare and Contrast the Learning/Conditioning Theory with Cognitive Models of Panic Disorder
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
4 pages (1000 words) Essay
Compare and contrast the contributions of trait theory and personal construct theory to the study of individual differences. Mak
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.
6 pages (1500 words) Essay
Theory Paper (Compare and Contrast)
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.
5 pages (1250 words) Essay
Compare and Contrast the social causation theory with the social selection theory of the origins of mental illness
They considered both a social causation and a social selection hypothesis, and concluded that this concentration of schizophrenic patients was caused by the social conditions in the central city and
10 pages (2500 words) Essay
Compare and contrast marx and weber's theory of mondern domination
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
8 pages (2000 words) Essay
Compare and contrast two of the following theories of social development: Modernisation theory Dependency theory World systems theory
It gives emphasis on the development of the social scenario of the society. In modernization theory various Marxist concepts are explained which is related to the development and
8 pages (2000 words) Essay
Compare and contrast two theory of reflective practice
ifferently based on past experiences and this helps them to act differently as a changed person (Boyd and Fales, 1983).Reflective practice can also be defined as examining ones thoughts and actions. For clinical practitioners, it involves looking on how they interact with other
8 pages (2000 words) Essay
Prospect Theory
The utility theory examines the changes in consumer satisfaction based on the amount or level gained from consuming an extra unit of the preferred good. The theory explains that alternatives can
4 pages (1000 words) Essay
Hire a pro to write
a paper under your requirements!
Win a special DISCOUNT!
Put in your e-mail and click the button with your lucky finger
Your email
YOUR PRIZE:
Apply my DISCOUNT
Comments (0)
Click to create a comment