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The Implications Of Prospect Theory

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The aspects that prospect theory takes into account and the expected utility doesn’t, are emphasis on low probability events and protective willingness, which means greater risk aversion for precautionary decisions under risk (Kusev, P., van Schaik, P., Ayton, P., Dent, J. & Chater, N. 2009). These are called heuristics and biases in decision making. In this part, other heuristics and biases of framing of the problem, gambler’s fallacy and overconfidence will be discussed in depth with respective example and ACAR of its significance on process of making decisions. Firstly, the bias is framing of the problem. When people frame the problem in different ways, it will result in different decision. The example is observed when ‘the description of options in terms of gains (positive frame) rather than losses (negative frame) elicits systematically different choices’ (Gonzalez, C., Dana, J., Koshino, H. & Just, M. 2005). This takes an important place in business decision making. ACAR is made following. Frame (2012) outlines that framing is the first step when people make decisions. Russo and Schoemaker (1989) proves that this bias affects the recognition and response to problems by providing the ‘boundaries (what will be considered part of the choice set), reference points (elements used to determine success and failure), and yardsticks (how the outcomes are measured)’. Nevertheless, different people can have different framing of the problem so if they exchange thoughts, outcomes
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