SOUNDING BOARD is an outlet for opinions on good and crazy things going on at home (wherever I may be). All are welcome. You are not expected to bring anything except your common sense & sense of humor.
'If the automobile had followed the same development cycle as the computer, a Rolls-Royce would today cost $100, get one million miles to the gallon, and explode once a year, killing everyone inside.'
-Robert X. Cringely (from geek wisdom)
SOUNDING BOARD
Wednesday, October 09, 2002
_____________________________________________
Nobel Prize for Economics this year: alternative to utility maximization assumptions
The Nobel Prize for Economics this year was given to Daniel Kahneman (Princeton) and Vernon Smith (George Mason) – both for psychological and experimental economics. Kahnehan won for his work on decision-making under uncertainty. His findings point to a situation wherein individuals are much more sensitive to the way an outcome deviates from a status quo than to the absolute outcome. Under conditions of risk, individuals therefore appear to base each decision on its gains and losses individually rather than on the consequences of a decision for their wealth in general. He also stated that most individuals seem to be more averse to losses, relative to the status quo, than biased to gains of the same size. These results contradict predictions from the traditional theory of expected-utility maximization. And given these criticisms, Kahneman and Tversky (Amos Tversky, pshychologist from Stanford, died in 1996) developed an alternative theory, - prospect theory, which embodies human behavior uncaptured by utility maximization.
As discussed also in my 29 September 2002 entry, Jennifer Naimolski (University of Michigan) did an analysis using prospect theory on the behavior of Saddam during the late 90s when Saddam prevented the weapons' inspectors from carrying out their job. She points to prospect theory as a more proper explanation of Saddam's bahavior then than rational choice theory. According to Naimolski's application of rational choice theory, if Saddam was acting on the basis of rationality, he would have let the inspectors come in (due to the overwhelming strength of US vs Iraq). Saddam didn't, and she explained that it was because Saddam was acting on the domain of loss - prospect theory says people are more risk averse to losses, and hence will do anything to prevent it.
posted by Allan at 11:39 PM (GMT+8)
permalink (URL of this post) ::
