Daniel Kahneman's perspective theory
Jul 15, 2021
In the field of psychology applied to economic behavior highlights the figure of Daniel Kahneman, an Israeli-American author whose work has focused on the determinants of decision-making in situations where profits 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 bounded rationality, in which he questions the idea that the human being is fundamentally rational.
In this article We will look at Kahneman's perspective theory and his regular 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: "Herbert Simon's Theory of Bounded Rationality"
Biography and work of Daniel Kahneman
Daniel Kahneman was born in 1934 in Tel Aviv, although he grew up in France around the time World War II. Later his family moved to Palestine. From her childhood and his youth, Kahneman highlights the relevance of human interaction and complexity in Jewish culture
In 1961 he received a doctorate 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, behavioral economics, and hedonistic psychology, a branch 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 multiple contributions to this field that he has made from psychology in collaboration with the late Amos Tversky. His work on decision-making under conditions of uncertainty was especially highlighted. He has also received awards from the American Psychological Association and the Society of Experimental Psychologists, among others.
Kahneman is currently Professor Emeritus and Senior Research Fellow at the Woodrow Wilson School of Public and International Affairs, which is part of Princeton University in New Jersey. He is also an honorary member of the Universities of Berkeley and British Columbia, as well as the Hebrew University of Jerusalem and other institutions.
Kahneman and Tversky's theory of perspectives
The prospective theory of Kahneman and Tversky, also known as the theory of perspectives or aversion to losses, develops the expected utility hypothesis, a concept from game economic theory that states that people we choose the alternative that we consider most useful from among those available to face a specific situation.
According to outlook theory, when there is uncertainty about the results we tend to opt for safe rewards over less likely ones, although the value of the former is lower.
We also attach more importance to small losses, even if unlikely, than to moderate gains; the authors call this "loss aversion". Due to our aversion to losses, should we be presented with two equivalent alternatives of the Whichever one is formulated in terms of profit and the other in terms of losses, it is most likely that we will choose to avoid second. In short, we prefer to avoid losses than to make profits.
Thus, for example, if two financial advisors propose to invest in the same shares but the first one highlights that they have a moderate average profitability and the second that its profit ratio has decreased in recent years, we will prefer the offer of the first adviser.
Kahneman and Tversky stated that the loss perspective has a greater emotional impact than the profit perspective and that we tend to perceive the probability of injury as 50/50, regardless of how much less it is.
- You may be interested: "Top 10 psychological theories"
In addition to the concept of loss aversion that we have already seen, the theory of perspectives contributes two other fundamental aspects: the assessment relative to a reference point and variable sensitivity.
The reference point is broadly identified with the average expectation of a given benefit or cost. This reference point can be an amount of money, such as the usual price of a good or the salary that we obtain 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 will probably choose to buy in the second one, but we will not make the same effort to save 10 cents on the purchase of a household appliance.
Applications of this model
The theory of perspectives frequently applied to people's economic behavior. It is useful for predicting behavior in areas such as organizational psychology, 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 suppose us a greater satisfaction, as happens when someone rejects a job that is better paid than the one they already have because accepting it would imply a change of address and style lifetime.
Likewise, Kahneman's theory justifies the so-called endowment effect, which makes people give a greater value than they objectively have to some things for emotional reasons. Following the example above, someone may choose to continue living in their current city because most of their loved ones reside there.