Effective Appraisal Approaches And Its Influence On Investment Decision Making

Prospect theory is a theory of decision making under conditions of risk. The theory is best known for its hypothesis that individuals are risk-averse with respect to gains and risk-acceptant with respect to losses and for its emphasis on the importance of the actor's framing of decisions around a reference point.

The idea of “risk” is used in many fields and industries. There has been large efforts made towards the understanding of risk. Since, risk varies so much depending on the field of study, the need for learning about it is warranted. As can be imagined, the importance of risk in a market economy is crucial. In the 1990s, JP Morgan made the Value at Risk (VaR) a central component of its work efforts (Cecilia-Nicoleta, Anne-Marie, & Carmen-Maria, 2011).

* There are three (3) schools of thought regarding risk. The first considers the positive and negative aspects of risk, but sees them as separate. The second group believes that there are benefits from treating threats and opportunities together, while the third school does not label uncertainties, but addresses uncertainty as part of “doing the job.” Argue the value of having a risk strategy despite the cost associated with it. Include an example to support

In order to demonstrate flaws of the traditional view, Kahneman supports three principles of prospect theory with various examples. First, by pointing out errors in Bernoulli’s model and the indifferent model, Kahneman emphasizes the broad range of the reference point, that it is not only the change of wealth, but also the context and the mindset. Second, Kahneman analyzes loss aversion, one of the dominant mindsets. Third, Kahneman argue that sensitivity has great impact on decision making by providing gambling cases of rare and risky events. With the knowledge of these three principles, Kahneman further implies that people can be trained to against these intuitive system one thinking patterns.

According to Frank Knight, who was an economic explore, he was keen to explore the concept of risk is arguably known as the probability distribution over a set of given events. However, from various definitions of uncertainties,

Prospect theory is an important alternative descriptive theory for decision-making under unreliable situation (Kahneman and Tversky 1979), which includes real life selection and psychological analysis between choices that involve risk. Prospect theory, which efforts to explain individual make decisions between risky replacements based on the value of potential gains and losses (Wakker 2010), advanced from expected utility theory, which explains that investors want to maximize expected utility of wealth when unclearly situations (Blavatskyy 2007). According to Kahneman and Tversky (1992), more recent researches perceived nonlinear preferences in choices that do not involve definite events in prospective theory. The concept of framing effect refers description invariances (Kahneman and Tversky 1992). To be specific, individual always makes the same decision in identical choice conditions. Also, decision makers have tendency to

Published in the July 2016 issue of Cognitive Science, Gonzalez and Mehlhorn’s article, “Framing from Experience: Cognitive Processes and Predictions of Risky Choice,” seeks to advance the work of renowned behavioral economists Tversky and Kahneman. Tversky and Kahneman, a seminal pairing in the fields of economics, cognitive science, and psychology, investigated biases in human decision making that led people to make sub-optimal choices. One of their principle theories, prospect theory, framed decision-making in two graphs. First, they proposed a value graph comparing the subjective and actual values of gains and losses. It took the form of an asymmetrical s-curve, with humans experiencing more displeasure from losses than pleasure from gains and reaping less marginal pleasure from further gains once already at a position of significant gains (Kahneman & Tversky, 1984). Second, they proposed a probability graph which showed that humans tend to overweight low likelihood events and underweight high likelihood events (Kahneman & Tversky, 1984). Taken together, these functions explain some elements of human behavior: people are generally more loss-averse than gain-seeking at a neutral position, they value gains more at a position of loss, and they value gains less at a position of gain.

Prospect theory. The theory can be represented by a value function, as shown below. The value function starts from a reference point, and is normally concave for gains, and convex for losses. It is also steeper for losses than for gains. The theory intends to explain why people behave irrationally when making choices.

Low risk is attractive because the lower the risk, the higher the certainty of success. Risk would be defined as “the chance that an investment will lose value. We want our product to have a low change of losing value. A high chance that our investment will lose value is a bad thing. Now that we know we want, let’s evaluate whether our investment will be wise given the firms competencies, resources and objectives.

1.2.1 Types of Risk ..................................................................................... 10 1.2.2 Methods of Risk Evaluation............................................................... 11 1.2.2.1 Quantitative Risk

Every company aims to utilize its resources efficiently to maximize the benefits of its stakeholders. With a satisfying rate of return, investors invest more in the company, customers trust the quality of its products, and employees keep a stable job. However, every enterprise is always faced with some degree of uncertainty. Uncertainty can be categorized as two types: risk and opportunity depending on how the enterprise treat the challenge. Take the online shopping as an example. Before the online retail became a mainstream, many retailers foresaw the opportunities online. They took advantage

Prospect theory is a Behavioural Economics Theory which tries to understand how people take decisions in terms of two alternatives, which have a probabilistic nature. These decision making processes and their respective outcomes also involve risk. An important point of the Prospect Theory is that it considers the fact that the outcomes of the alternatives are known. The basic idea behind the theory is that people base their decisions on potential gains and losses, rather than thinking about the final outcome. The theory is of the idea that people make such decisions about gains and losses with the help of heuristics. The theory has been very critical in its application as it tries to bring forth a model which is much more realistic in nature,

In part, Prospect Theory offers insights into why people make non-optimizing decisions rather than only those that are profit maximizing. Prospect Theory is central to much of Behavioural Finance and is often contrasted with the more conventional Efficient Market Hypothesis and Expected Utility Theory.

The building is close to the 10, 110 and 101 freeways, as well as it is 1 mile from Mid Wilshire, 1.2 miles from Downtown, 2.6 miles from Dodger Stadium, and 7.5 miles from Hollywood.

In order to assess the viability of the project, only relevant figures provided by financial accountants are included in calculations. Furthermore, additional information obtained during meetings with senior managers have been considered.