Naturally, human beings prefer alternatives that keep them with positive emotions and evade the ones likely to yield a negative feeling regardless of the outcome. In the face of two equal competing options, one with a perceived chance of gain and the second with a potential loss, an individual will opt for the first. The prospect theory prompts an individual to decide based on perceived gains and avoiding perceived losses (Chen). An investor will choose an option with higher estimated benefits if presented with two choices of profits. Likewise, if presented with choices of losses, an investor will go for the one with the least magnitude of the damage. There are two types of prospect theory; certainty theory prefers predictable outcomes over probable ones while in isolation theory outcomes are similar, but the method to achieving the result differs. The prospect approach encourages an individual to retain his/her wealth state rather than taking a risk that may compromise the wealth at hand (Harley). In my perspective, prospect theory limits the risk-taking attitude investors and consumers need to have while venturing in business. While struggling to avoid risks, one is likely to miss out on an incredible opportunity to make massive profits even though there may be losses.
I once desired to buy a mattress to replace my old one. At that moment, I wanted to save as much money as I could to cater for my school expenses. At the shop, I had two mattresses; one was a bit expensive than the other one. The expensive one was supposed to serve me for relatively long, while the cheaper one would help me retain more cash. Eventually, I opted to go for the cheaper one so that I would remain with more money. After a few years, the mattress depreciated, and I was forced to buy a higher quality mattress.
Chen, James. “Prospect Theory.” Investopedia, 28 July 2020, www.investopedia.com/terms/p/prospecttheory.asp.
Harley, Aurora. “Prospect Theory and Loss Aversion: How Users Make Decisions.” Nielsen Norman Group, 19 2016, www.nngroup.com/articles/prospect-theory/.