Evaluating Risks: The Psychological Implications of Prospect Theory

Daniel Kahneman and Amos Tversky discovered one of the most remarkable things about human psychology with their research on behavioral economics.  In 1979, they published a paper called “Toward a Positive Theory of Consumer Choice”.  Also known as prospect theory, their research showed that people were generally risk adverse for gains and risk takers for losses.  For example, if someone was given the option of being given $240 for certain or having a 75% of being given $1000 and a 25% of getting nothing, there’s an 84% chance of them not taking the risk and settling for the $240.  Conversely, if someone was forced to pay $750 for certain or risk a 75% chance of paying $1000 as opposed $0, there’s an 87% chance of them taking the risk in order to lose nothing.  This behavior might seem irrational because the result of picking either option has the same probability.  It shows that losses have more of an emotional impact on us than an equivalent amount of gain, proving we are generally more conservative in our behavior than open to new explorations. 

This may apply to other areas of decision making, such as emotional and social decisions.  The introverts I’ve known, including myself, would rather stay clear of human contact because the fear of loss is greater than the possibility of making a new friend.  Likewise, people who have trouble with intimacy may cut ties with their mate as soon as they feel like the risk of losing them is greater than a lasting relationship.  This can even be seen in sports, when the most successful and competitive people go up against each other.  In a game like basketball, you will see a handful of men who would rather not take the last shot of a tied game, despite there being a 50% chance of them making it.  This is because they’d rather not be responsible for a loss than be responsible for a win.  However, there are obviously those among us who have no fear of taking that last shot, who would risk a lot of money in a poker game, or who would have more friends than anyone else we know.  These are both the most successful and the least successful people.  The gamblers are the outliers of society; they either sit at the top of the hierarchy with shrewd risk-taking and a bit of luck or grovel at the bottom because of their constant misfortunes. 

Daniel Kahneman won the Nobel Prize in Economics in 2002 for his work on prospect theory. 

Rivers of Light

You’re a wonder, a star, a stream of light waving in the sky. 
You fly, you fall, you pick yourself back up. 
You feel the wind on your face, and fly again. 
You’ve become reborn, a river of weightlessness 
    Made of silver and silent rain. 
 
Look to the east, to the land where you came from. 
The life you left behind is a trail that wound through mountains, 
Around corners that revealed new friendships and challenges. 
You marked each milepost on it with memories of gold, 
    Gold that shined with every return of the sun. 
 
You live within the stillness of time, the order of things. 
The universe grows on a grid of towers made of glass, 
Molded from the mountains you traveled through, 
In an endless sky that can only be conquered 
    By reaching each of their summits. 
 
The light is dissolving into air, a darkness is coming. 
You will have to face them, the things you failed to learn. 
The universe has great plans for you, don’t fight it. 
Make your river run as smoothly as a baby’s soul, 
    Content in every breath of its innocence. 
 
Your river drains into a sea of serenity resting in the darkness. 
The miles of your life are released as the water disperses, 
Casting each memory out of your mind and into the void. 
You try to hold onto the best ones, but the current sucks them away, 
    Into the looking glass that lays at the bottom. 
 
You’ve entered a peaceful and thoughtless state of mind. 
That world of trickery and hate you left behind 
Is now only a shadow on the distant shore, 
As all the water you carried spins away in a spiral, 
    Getting lost in the vortex below, like dust in a Black Hole. 
 
Those towers of wisdom you meandered through, 
The ones you tried to climb, will return to you someday. 
But first you must cleanse yourself in this ocean of death, 
Ridding your river of its impurities, washing away every phobia 
    That it picked up along the way. 
 
Everyone gets a second chance, even the most evil people. 
Some of them get stuck in mighty rapids or dams built by sin. 
Their rivers clog up, constricting them of movement. 
They become lost in time, as immobile as ghosts, yearning for a backflow, 
    Until it finally bursts and they’re able to flow freely. 
 
But not you, you child of the ocean. 
You’re like a hero that fights for nothing, 
A vagabond and a King, enchanted by the world; 
A wanderer who rolls with each change of scenery, 
    Playing new bells with each face you draw. 
 
You’re a wonder, a star; a weaving, silvery light. 
You stumble, you fall from grace, you lift yourself to the sky. 
You rise on the wings of the wind, evaporated into thin air. 
You return to the mountains that caused you to fall, in a storm of rebirth, 
    Made of silver and silent rain.