Daniel Kahneman and Amos Tversky discovered one of the most remarkable things about human psychology with their research on behavioral economics. In 1979, they published a paper called “Toward a Positive Theory of Consumer Choice”. Also known as prospect theory, their research showed that people were generally risk adverse for gains and risk takers for losses. For example, if someone was given the option of being given $240 for certain or having a 75% of being given $1000 and a 25% of getting nothing, there’s an 84% chance of them not taking the risk and settling for the $240. Conversely, if someone was forced to pay $750 for certain or risk a 75% chance of paying $1000 as opposed $0, there’s an 87% chance of them taking the risk in order to lose nothing. This behavior might seem irrational because the result of picking either option has the same probability. It shows that losses have more of an emotional impact on us than an equivalent amount of gain, proving we are generally more conservative in our behavior than open to new explorations.
This may apply to other areas of decision making, such as emotional and social decisions. The introverts I’ve known, including myself, would rather stay clear of human contact because the fear of loss is greater than the possibility of making a new friend. Likewise, people who have trouble with intimacy may cut ties with their mate as soon as they feel like the risk of losing them is greater than a lasting relationship. This can even be seen in sports, when the most successful and competitive people go up against each other. In a game like basketball, you will see a handful of men who would rather not take the last shot of a tied game, despite there being a 50% chance of them making it. This is because they’d rather not be responsible for a loss than be responsible for a win. However, there are obviously those among us who have no fear of taking that last shot, who would risk a lot of money in a poker game, or who would have more friends than anyone else we know. These are both the most successful and the least successful people. The gamblers are the outliers of society; they either sit at the top of the hierarchy with shrewd risk-taking and a bit of luck or grovel at the bottom because of their constant misfortunes.
Daniel Kahneman won the Nobel Prize in Economics in 2002 for his work on prospect theory.
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