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Why do emotions influence our choices? Explore the mystery of prospect theory!
In the history of economics, behavioral economics, as a new research field, has received increasing attention. This is a discipline that combines psychology, neuroscience, and microeconomic theory to study how people make choices in irrational situations and how these choices fall outside the scope of traditional economics. The core of behavioral economics is that it challenges the "rational person" assumption in traditional economics and takes emotional factors into consideration. In particular, the introduction of prospect theory clearly explains the behavioral patterns of humans when facing risks and uncertainties. .
Prospect theory reveals that people react differently to gains and losses, and that when making choices, certain outcomes tend to be overvalued relative to uncertain outcomes.
Foundations of Prospect Theory
Prospect theory was proposed by psychologists Daniel Kahneman and Amos Tversky in 1979. It mainly explains how people are influenced by emotions and cognitive biases when making economic decisions. The theory consists of two main phases: the editing phase and the evaluation phase. During the editing phase, people use various heuristics to simplify risk situations, while during the evaluation phase, people use psychological principles to evaluate risky choices.
One of the key concepts is "loss aversion," which means that people typically feel losses more strongly than they feel the pleasure of an equal gain.
How emotions influence choices
Emotions play a huge role in decision making. According to prospect theory, when people are faced with potential losses, they often react more intensely than when faced with potential gains. This means that even a small loss can cause unnecessary anxiety and fear, which in turn affects the final choice. Furthermore, this emotional response can lead people to choose more conservative options rather than the best option after rational analysis.
Emotional fluctuations not only increase the complexity of decision-making, but also trigger many cognitive biases, causing people to often fall into psychological traps when making choices.
Implications for behavioral economics
The skepticism of behavioral economics has led researchers to re-evaluate the construction of economic models. The work of Kahneman and Tversky drove the development of the field and led to a deeper understanding of economic behavior. As this field has further developed, many well-known applications have emerged, such as Nudge Theory, a method of guiding individuals to make better decisions through choice architecture.
Nudge theory proposes ways to guide people to make healthier and more informed decisions without taking away their freedom to choose.
Application and adjustment of promotion theory
Nudge theory has been widely used in fields such as public policy, business management, and healthcare. A simple example is placing healthy foods in a prominent position in a supermarket to increase the chances of consumers buying such foods. However, the theory has also encountered a lot of criticism, with some people worrying that this intervention may undermine individual autonomy and questioning its ethical and scientific basis.
ConclusionBy combining insights from psychology, behavioral economics uncovers psychological factors that are not considered in traditional economics and allows us to better understand the important role that emotions play in our choices. As we learn more, we will not only be able to identify potential biases, but also use them as a basis to design more effective decision-making frameworks to improve the quality of choices.
Do you think that emotions will play a greater role in economic decision-making in the future?
