Our second reading response assignment will be on a classic paper “Prospect theory: an analysis of decision under risk (https://www.uzh.ch/cmsssl/suz/dam/jcr:00000000-64a0-5b1c-0000-00003b7ec704/10.05-kahneman-tversky-79.pdf)” by Daniel Kahneman and Amos Tversky. The authors were writing from the perspective of psychologists critiquing the canonical model of Expected Utility Theory. They report the results of hypothetical choice problems posed to real people to illuminate ways in which behavior appears to systematically contradict a strict interpretation of EUT. They propose a reformulation of EUT to incorporate what they see as the behavioral regularities they have found.
This is a pretty long and pretty dense paper, so as I mentioned in class please feel free to focus on parts that stood out to you—there’s no need to study every word of the paper in detail! Please write around 300-500 words to tell us what you took away from the reading. What stood out to you? What was interesting, confusing, or surprising? What connections came to your mind when reading? If you’d like some more concrete questions to help structure your answer:
1. Which of the choice experiments particularly stood out to you and why? Do you think the hypothetical questions posed tell us anything about how people might behave in important real-world scenarios?
2. What do you think might be the strengths and weaknesses of the Prospect Theory model that the authors propose as compared to Expected Utility Theory? How significant do the differences between the models seem?
3. Over the last 50 years, the field of behavioral economics has enriched our understanding of the intersection of economics and psychology. Based on either your knowledge of the field, the article, and/or your conjecture, what is your impression about what economists and psychologists can offer to each other? What do you think would be some interesting areas of overlap?
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