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The Origin of Prospect Theory, or Testing the Intuitive Statistician

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  • Floris Heukelom

    (Faculty of Economics, Universiteit van Amsterdam)

Abstract

The origin of prospect theory is the desire to test the intuitive statistician in the real world. The development of this theory by the cognitive psychologists Kahneman and Tversky can be traced to the formers work in cognitive psychophysics, in which deviations from average behavior are termed (statistical) errors; and the latters work on decision theory, with its normative vs. descriptive framework. The combination of these two types of probabilistic psychology culminated in a new descriptive theory of human decision making in the real world, coined Heuristics and Biases. The 1979 Econometrica article applies this new descriptive theory to economists EUT. It equates the intuitive statistician with the rational economic man and shows how it descriptively fails.

Suggested Citation

  • Floris Heukelom, 2005. "The Origin of Prospect Theory, or Testing the Intuitive Statistician," Tinbergen Institute Discussion Papers 05-111/2, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20050111
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    File URL: https://papers.tinbergen.nl/05111.pdf
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    References listed on IDEAS

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    1. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    2. Laibson, David & Zeckhauser, Richard, 1998. "Amos Tversky and the Ascent of Behavioral Economics," Journal of Risk and Uncertainty, Springer, vol. 16(1), pages 7-47, April.
    3. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680.
    4. Tversky, Amos & Kahneman, Daniel, 1986. "Rational Choice and the Framing of Decisions," The Journal of Business, University of Chicago Press, vol. 59(4), pages 251-278, October.
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    Cited by:

    1. Basel, Jörn S. & Brühl, Rolf, 2013. "Rationality and dual process models of reasoning in managerial cognition and decision making," European Management Journal, Elsevier, vol. 31(6), pages 745-754.

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    More about this item

    Keywords

    Kahneman and Tversky; Prospect Theory; Intuitive Statistician; Heuristics and Biases;
    All these keywords.

    JEL classification:

    • B31 - Schools of Economic Thought and Methodology - - History of Economic Thought: Individuals - - - Individuals
    • B41 - Schools of Economic Thought and Methodology - - Economic Methodology - - - Economic Methodology
    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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