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Topic: Psychology
Number of pages / Number of words: 3 / 835
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If we set the frame to $-1000, both alternatives are set in gains. The concavity of the value function in gains can then lead to a preference for buying the insurance.

We see in this example that a strong overweighting of small probabilities can also undo the effect of the convexity of v in losses: the potential outcome of losing $1000 is overweighted...


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This is an explanation for the fact that people, e.g., simultaneously buy lottery tickets and insurances, but still invest money conservatively.

Some behaviors observed in economics, like the disposition effect or the reversing of risk aversion/risk seeking in case of gains or losses (termed the reflection effect), can also be explained referring to the prospect theory...


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