Saturday, May 05, 2007

Prospect Theory

I've been doing some reading about prospect theory lately. Prospect theory basically says that people tend to risk more to keep something than they risked in acquiring it in the first place. It also says that people are more willing to accept incremental gains that are a sure thing than they are willing to accept a chance at a huge gain. I'm sure a true connoisseur prospect theory will cringe at this over simplified explanation, but I think it makes the point.

To me, prospect theory is just another good example of the concept of least cost, plain and simple. Over billions of years of evolution, humans have gained the ability to determine which path will require the least amount of energy. When viewed objectively in the context of the modern world, where resources such as food are plentiful, some decisions that people make, which would seem perfectly rational 50,000 years ago, seem downright comical today.

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