Bernoulli's Errors
Economics tends to take a rather strange view of how people's psychology operates when making decisions, versus the field of psychology. Instead of making choices based upon personal preferences, economics views human decision-making as a rather abstract process. For example, people are assumed to make choices between apples and oranges based upon price alone. But the intuitive choice is not necessarily the most rational choice. The chapter also discusses Bernoulli's supposition that people prefer a 'sure thing' versus a risk. However, in the real world, individuals often act in ways that seem risky, foolhardy, and against their best interests. Economics often fails to consider that decision-maker's perceptions of utility and risk depend upon their perceptions of their personal wealth -- and the history of their wealth, not rationality alone.
Prospect Theory
This chapter begins with a self-examination: Bernoulli's theory rests...
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