Prospect Theory: An Overview

This video explains Prospect Theory, one of the foundational contributions of Behavioral Economics. I go over three important parts to Prospect Theory: (1) Loss aversion, (2) Reference point origin and (3) risk-seeking behavior in the negative realm / risk-averse behavior in the positive realm.
0:26 - Three Features
1:48 - Loss Aversion
5:57 - Reference point / Expectations
9:25 -

[@nonsense7375]

This video surpassed my EXPECTATION!

[@el_thid]

You explained the concept better in 13 minutes than my lecturer managed in 3 hours. Thankyou!

[@IraqiSimpleFood]

Hands down, the best explanation of Prospect Theory. Thanks Ashley!

[@cpuzz8264]

I never comment on how well things are explained in youtube videos but I had to on this one. Great job!

[@jeffreygoh4647]

Explanation clearer than some professors’. Thank you.

[@michaeljbuckley]

Explained the risk seeking in loss aversion excellently.

[@Sindbad232]

This is mindblowing ngl

[@NoOne-qd2yp]

Beautiful teacher, beautiful topic, am very inspiring to learn. Subscribed.

[@mayankkumarmittal]

Such a nice explanation. made so simple to understand. It helped in my CMT Exam. People are occupied with junk stuff on the internet. Channels like this are Gems.

[@tjsmind]

What a fascinating concept. Impeccable explanation!

[@justinjohnson8666]

Wow thank you soooo much you explained this concept so well that I am not gonna forget this for sure , god I wish I had a teacher like you, your students are the luckiest.

[@cynthiaannecchini1351]

Thank you for your brilliant explanation! I spent hours reading my notes and listened to lecturer online and still not clear. I understood it after listening for 5 minutes, great work Ashley!

[@abdikafimohamud2931]

This is so clearly explained! This video should have had a lot more views than this

[@minimonie9825]

Very informative. Thank you so much!

[@ozoxxx]

I would say that people fair loses more than they desire gains. not that they hate loses more than they love gains. there is quite difference and since we are talking about subjectivity and emotions, this should take into account. Thanks for the content.

[@bongoflava11]

Someone who can actually explain stuff. Hats off to you and keep on doing what you do best

[@n0_n0]

These videos are incredibly well done and helpful! Great work and I hope you keep them coming!!

[@anakagungbaguswirayuda9593]

wow, this explanation answer a lot of social and psychological questions in human behavior. At least, the ones that I think of

[@stephenkimani7150]

Thanks for explaining this so precisely!

[@sun-riseshetty556]

beautiful explanation...

[@rulz4us]

You explain things perfectly. Thanks for the videos.

[@stevesimpson5994]

That was an exceptional summary. Thank you :-)

[@user-nb6ef1jm2h]

This video had a lot of utility for me I feel like I own it. I really don't want to loose it so I saved it for free. ;)

[@krullsull]

Thank you for explaining this in such easy to understand manner. My MSc prof went too much of a complicated direction

[@ashishkiift]

Ashley .. I am so fortunate to have stumbled upon this .. You are such an incredibly gifted teacher .. wanted to use this concept for a consumer behaviour problem .. is there a way to connect for further questions .. Thanks

[@aaronrey2658]

Awesome! Ashley, you should consider breaking down the 1000 most important econ concepts in videos, labs, data, etc. and shut the field down completely:) from the 10,000 average to well below avg. professors that have butchered the learning pedagogy in the field the last 40yrs.. you can be the Khan Academy of Econ.. Seriously.. you could teach a course in how to teach econ..

[@douglasmutua6967]

Great explanation

[@Samtaztic99]

How does Prospect Theory differ from Expected Utility Theory? Also, for confirmation, if I am correct: 1) The function being relatively steep in the loss zone and relativelt horizontal in the gains zone explains loss aversion. 2) The 0,0 interval is the reference point. 3) The function being convex in the loss area and concave in the gains area explains risk aversion and risk seeking behaviour in different situations. Please correct me if I am wrong, thank you.

[@massimilianomanzini1726]

Ashley you literally saved me. So clear, thanks a lot

[@alexandrav.paredes5964]

This is very good, thank you.

[@mbogocapital]

Good teacher.

[@akashagarwal9747]

Excellent explanation Ashley

[@annadovha6998]

I love your channel, thank you!

[@JoshKoaster]

Thank you for making the explanation so clear! :)

[@maksymrudnichenko5688]

Thanks for a clear and easy-to understand explanation!

[@hiteshthakkar7716]

Similarly, Christmas bonus : most can relate with expectation management by bosses before performance payouts ;-)

[@thisisnotmyrealname6046]

Day before the exam, you just saved my grade!

[@phillipnormann1319]

Great video! Thanks for the easy explanations and practical examples 😊

[@Alejmen009]

Thank you. The examples helped a lot.

[@ashwinsivakumar13]

clear and concise explanation. thanks

[@titusmazima4187]

Thank you very much

[@sun-riseshetty556]

Marvelous... Well explained..

[@amyjennthg123]

THANK YOU!

[@user-or3zv2xl8r]

This covers the value function i propsect theory but not probability warping which is also important

[@kmkcorner]

Wow, thank you.

[@user-tm3wu6fh1d]

Very good

[@rajarshimajumder6659]

Awesome explanation!!

[@aziahabdshakur]

this is very well explained! tq so much!

[@lukemurray7285]

Thank you

[@marcuscitoandjuliaprunk]

that was so good - thank you & very helpful!

[@janlauterbach8204]

Great video, super useful

[@muskduh]

thanks so much

[@ibrahimmustafa4692]

you are the best . Thank you so much

[@plinden]

Preferring not to trade the pen for the mug because you have it, makes sense since you know how you feel about the pen, but you do not know quite how you feel about having the mug. It is not that these are not phenomena. It is the further declaration about what is rational that is questionable. The extra price you add to your bundle, is for covering the cost/risk of learning about other bundles/perhaps being wrong about its utility.

[@syremusic_]

Great point! Can you recommend some material to learn more about this?

[@plinden]

@@syremusic_ Thanks, let me get back to you. The general point here is that biases are part of our nature, and since they are, we should not be too quick to dismiss them as irrational. They may be rules of thumb that serves a greater rationality of survival. Being willing to trade something you like and know about, for something you have less information about may be a rational strategy from this perspective even if it looks arbitrary or irrational in an instance such as the one described.

[@DhanAadian]

good stuff

[@rnsbakhietrm5914]

Thank you. Very Informative

[@mrana5648]

Good explanation Ashley! Could you pls shed light on Editing and Evaluation phase of the theory? Thanks…

[@rumila372]

This is amazing!!

[@NateGPT]

So well done

[@Christinnaaaaa]

Amazing! Thank you so much for this!

[@thuhuongle4976]

Thank you for your videos! Your examples help me a lot in understanding the materials. In this particular video, though, I haven't understood how the mug-pen example connects to the graph. According to my understanding, holding the assigned mug or pen makes the person more attached to it (thinking it is more valuable). Hence, they wouldn't trade it for something that value less (in their perspective). I do not see how this act of trading is like moving along the graph. If it is, then what the x-axis represents here?

[@AshleyHodgson]

With the mug-pen example, people have lower value for a mug that they don't own (willingness to pay someone else to buy a mug: $3) than they do for a mug they own (willingness to sell a mug that is theirs: $5 required to give it up). So, if you move "1 mug" to the right of the origin, the utility on the graph might be $3 (or 3 utils), while "1 mug" to the left of the origin will put you at -$5 (or -5 utils).

[@thuhuongle4976]

​@@AshleyHodgsonAh, it's clear now. Thank you. We expect people to value the mug and the pen equally on average. This would likely happen if we ask them to choose between pen and mug without assigning since they are framing both as gains. With assigning, however, we change the reference point, making one a gain and the other a loss. Since people do not want to trade, we know that the graph must look like that: loss is steeper than gain.

[@JoaoVitorBRgomes]

Great. Kind regards from São Paulo.

[@patrickvanderlinde5283]

Thank you! really great content

[@bamdadsalarieh7125]

Nice explanation!

[@alfredarus3043]

Amazing!! Thank you

[@anthonylawton5363]

Brilliant - thanks for the hard work :)

[@andrewwei8087]

great explanation thank you!

[@faizaahmed6869]

its a good explanation maam. can we measure prospect theory as a secondary data what are those variables?

[@ResemeeC]

really helpful thanks!!

[@tarekz4505]

Thank you 🙏

[@jiayisong3119]

really great！thank you！

[@hiteshthakkar7716]

Replace pen and mug example with stocks of 2 diff cos, and everyone can relate

[@houghtonstreet3392]

I Love you

[@StephanieHughesDesign]

What Behavioral Economics textbooks are using for these courses? Thaler, Wilkinson, et al?

[@AshleyHodgson]

At the moment, I just use Thinking Fast & Slow, Thaler's Misbehaving and a couple of others in that vein. The first few times I taught it, I used the Wilkinson and Klaes textbook (www.amazon.com/Introduction-Behavioral-Economics-Nick-Wilkinson/dp/113752412X), which I thought was very helpful to begin with as an overview in the field.

[@StephanieHughesDesign]

@@AshleyHodgson Excellent 👍. Thank you!

[@Ksnieup]

Damn I thought I was smart by taking the sure bet😂