Risk
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Abstract Kahneman and Tversky and their behavioral economics stand in a long tradition of applying mathematics to human behavior. In the seventeenth century, attempts to describe rational behavior in mathematical terms run into problems with the formulation of the St. Petersburg paradox. Bernoulli’s celebrated solution to use utility instead of money marks the beginning of expected utility theory (EUT). Bernoulli’s work is taken up by psychophysics which in turn plays an important role in the making of modern economics.
Kahneman and Tversky and the Origin of Behavioral Economics
Prospect theory is a behavioral economic theory that describes decisions between alternatives that involve risk , where the probabilities of outcomes are known. The theory says that people make decisions based on the potential value of losses and gains rather than the final outcome, and that people evaluate these losses and gains using interesting heuristics. The model is descriptive : it tries to model real-life choices, rather than optimal decisions . The paper "Prospect Theory: An Analysis of Decision under Risk" has been called a "seminal paper in behavioral economics ". [ 1 ] The theory was developed by Daniel Kahneman , a professor at Princeton University 's Department of Psychology , and Amos Tversky in 1979 as a psychologically more accurate description of preferences compared to expected utility theory . It describes how people choose between probabilistic alternatives and evaluate potential losses and gains .
Prospect theory - Wikipedia, the free encyclopedia
Harry Markowitz - Wikipedia, the free encyclopedia
Harry Max Markowitz (born August 24, 1927) is an American economist and a recipient of the John von Neumann Theory Prize and the Nobel Memorial Prize in Economic Sciences . Markowitz is a professor of finance at the Rady School of Management at the University of California, San Diego (UCSD). He is best known for his pioneering work in Modern Portfolio Theory , studying the effects of asset risk , return , correlation and diversification on probable investment portfolio returns. [ edit ] Autobiography "Autobiography of Harry M. Marchoviz, The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 1990" can be viewed on the official website of The Nobel Foundation. [ 1 ]