International Journal of Social Science & Economic Research
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Title:
PROSPECT THEORY REVISITED: INCORPORATING DECISIONMAKERS' GOALS INTO THE VALUE FUNCTION

Authors:
John Leddo, Aditya Jayanti, Iris Duan

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1John Leddo, 2Aditya Jayanti, 2 Iris Duan
1. Director of research at MyEdMaster, LLC.
2. MyEdMaster, LLC

MLA 8
Leddo, John, et al. "PROSPECT THEORY REVISITED: INCORPORATING DECISIONMAKERS' GOALS INTO THE VALUE FUNCTION." Int. j. of Social Science and Economic Research, vol. 4, no. 10, Oct. 2019, pp. 6619-6640, ijsser.org/more2019.php?id=509. Accessed Oct. 2019.
APA
Leddo, J., Jayanti, A., & Duan, I. (2019, October). PROSPECT THEORY REVISITED: INCORPORATING DECISIONMAKERS' GOALS INTO THE VALUE FUNCTION. Int. j. of Social Science and Economic Research, 4(10), 6619-6640. Retrieved from ijsser.org/more2019.php?id=509
Chicago
Leddo, John, Aditya Jayanti, and Iris Duan. "PROSPECT THEORY REVISITED: INCORPORATING DECISIONMAKERS' GOALS INTO THE VALUE FUNCTION." Int. j. of Social Science and Economic Research 4, no. 10 (October 2019), 6619-6640. Accessed October, 2019. ijsser.org/more2019.php?id=509.

References
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Abstract:
Prospect Theory (Kahneman and Tversky, 1979) is a highly influential theory that predicts decision making when people are confronted with choices involving gains or losses with different degrees of uncertainty. Prospect Theory argues that people are generally risk averse when it comes to seeking gains and risk seeking when it comes to seeking losses. However, Prospect Theory was originally created using hypothetical decisions. As a result, Prospect Theory has had mixed results when subject to testing in real-world decision-making contexts. One reason for this is that people tend to have goals that they are trying to achieve or outcomes they are trying to avoid when making their decisions, something Prospect Theory does not take into account. The present research investigates the effects of such goals (called "aspiration levels") and avoidance outcomes (called "avoidance levels") on decision making. As a result, we hypothesize that, for decisions involving gains, people will be risk seeking until they achieve their desired goals (the opposite of what Prospect Theory predicts) and risk averse thereafter, and for decisions involving losses, people will be risk averse until they reach their avoidance levels (the opposite of what Prospect Theory predicts) and risk seeking thereafter. These hypotheses were testing using active duty military officers (real world decision makers) making choices among military options in scenarios involving gains and losses. The officers' decisions fit the pattern predicted by our revised Prospect Theory framework. Results suggest that understanding decision making must take into account the goals of the decision maker and whether they expected outcomes of those decisions will place the decision maker in terms of aspiration and avoidance levels.