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The theory of the perspectives of Daniel Kahneman

The theory of the perspectives of Daniel Kahneman

May 9, 2024

In the field of psychology applied to economic behavior highlights the figure of Daniel Kahneman , an American-Israeli author whose work has focused on the determinants of decision-making in situations where the benefits and losses are uncertain.

This psychologist, in addition to being one of the few who has won a Nobel Prize, is known for his research on limited rationality, in which he questions the idea that the human being is fundamentally rational.

In this article we will see the perspective theory of Kahneman and his usual collaborator, Amos Tversky . This model is one of the main developments of the classic concept of expected subjective utility, very relevant in economics and psychology.

  • Related article: "The theory of limited rationality of Herbert Simon"

Biography and work of Daniel Kahneman

Daniel Kahneman was born in 1934 in Tel Aviv, although he grew up in France at the time that surrounded the Second World War. Later his family moved to Palestine. From his childhood and his youth, Kahneman highlights the relevance of human interaction and complexity in Jewish culture and his own interest in existentialism as fundamental factors in his decision to become a psychologist.

In 1961 he received his Ph.D. in Psychology from the University of Berkeley, California, where he also studied mathematics. Later it would become a key figure in the study of human judgment, in behavioral economics and in hedonistic psychology , a side of positive psychology that focuses on the analysis of pleasure and the aspects that favor or harm it.

In 2002 Kahneman won the Nobel Prize in Economics in recognition of the many contributions to this field that he has made from psychology in collaboration with the late Amos Tversky. His work on decision making in uncertain conditions was especially highlighted. He has also received awards from the American Psychological Association and the Society of Experimental Psychologists, among others.

Kahneman is currently an emeritus professor and senior researcher at the Woodrow Wilson School of Public and International Affairs, part of Princeton University, New Jersey. He is also an honorary member of the universities of Berkeley and British Columbia, as well as of the Hebrew University of Jerusalem and other institutions.

The theory of the perspectives of Kahneman and Tversky

The prospective theory of Kahneman and Tversky, also known as theory of prospects or loss aversion, develops the hypothesis of expected utility, a concept of economic game theory that states that people we choose the alternative that we consider most useful among those available to face a specific situation.

According to the theory of perspectives, when there is uncertainty regarding the results we tend to opt for safe rewards to other less likely, although the value of the former is lower.

In addition we give more importance to the reduced losses, although they are improbable, than to the moderate gains; the authors call this "aversion to losses" . Due to our aversion to losses, in case we are presented with two equivalent alternatives, one of which is formulated in terms of profits and another of losses, the most likely option is to avoid the second. In short, we prefer to avoid losses than to make profits.

So, for example, if two financial advisors propose us to invest in the same shares, but the first emphasizes that they have a moderate average return and the second that their profit ratio has decreased in recent years, we will prefer the first adviser's offer.

Kahneman and Tversky claimed that the prospect of losses has a greater emotional impact than the profit perspective and that we tend to perceive the probability of damages as if it were 50/50, regardless of whether it is much smaller.

  • Maybe you are interested: "The 10 main psychological theories"

Main concepts

In addition to the concept of aversion to losses that we have already seen, the theory of perspectives provides two other fundamental aspects: the evaluation relative to a reference point and the variable sensitivity .

The reference point is broadly identified with the average expectation with respect to a certain benefit or cost . This benchmark can be an amount of money, such as the usual price of a good or the salary that we get each month, or any other quantitative indicator.

The concept of variable sensitivity refers to the fact that our sensitivity to losses decreases as the reference point increases . For example, if a kilo of tomatoes costs 60 cents in a store on our street and 50 in another that is 15 minutes away, we probably choose to buy in the second, but we will not make the same effort to save 10 cents in the purchase of a household appliance.

Applications of this model

The theory of perspectives is frequently applied to the economic behavior of people . It is useful to predict behavior in areas such as the psychology of organizations, the game and the economy itself.

This model explains different psychological effects, such as the "status quo". In economics, this term refers to the fact that people often prefer to maintain the current state if we are offered alternatives that do not mean greater satisfaction, as when someone rejects a job better paid than they already have because they accept it. It would imply a change of address and lifestyle.

Also, Kahneman's theory justifies the so-called endowment effect , which makes people give more value than they have objectively to some things for emotional reasons. Following the previous example, it is possible that someone chooses to continue living in their current city because most of their loved ones reside in it.

Daniel Kahneman: "Thinking, Fast and Slow" | Talks at Google (May 2024).

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