prospect theory and mental accounting – Flashcards

Kahneman and Tversky - 1979 -how people consider risky outcomes -what should we do to maximize actual happiness -fathers of behavioral finance

1. risk averse in regards to gains 2. risk seeking in regards to losses 3. losses loom bigger than gains 4. segregate gains 5. aggregate losses

1. segregate gains (infomercial) 2. integrate losses (side effects may include) 3. silver lining effect (take small gains away from big losses- rebates) 4. cancel losses against larger gains (not noticing small amount of taxes out of 401k)

people seek to lock in stock gains, selling stocks that have historically risen too soon

richard thaler (1980) -describes the process whereby people code, categorize and evaluate economic outcomes -people lump their assets into a number of non fungible accounts -people give names to their money

the thought that money has no labels and that people do not associate money with anything specific -does not hold true in mental accounting

cash is limited and labeled more valuable so people refrain from giving away cash credit cards are in a mental account that is labeled as unlimited usable money so it gets spent first

when income is not specified for a given account and will generally splurge rather than using it to pay high interest debt prone to this when amount seems small to us example-tax refund

1.get into the most protected account 2. capitalize on integration of losses 3. credit as a highly spendable account 4. capitalize on peoples' sense of windfall

system 1: intuitive and automatic (heuristics and biases and emotions) system 2: calculating but lazy (rational mind that may override system 1)