Are You a Risk Taker?
Every day we make choices that involve risks and rewards. How can we better understand the ways our minds process these trade-offs?
We all assume our actions reflect our preferences for risky or safe behaviors. Some people focus on the potential payoff of bets. Others take comfort in safe behaviors that help us avoid risks. But how do these preferences play out in our everyday lives? And how can we better understand our tendency to take or avoid risks in different situations?
This exhibit asks visitors to consider how they would behave in two imaginary scenarios: winning a charity raffle, and making an investment that takes a bad turn.
Images from the Exhibit
This exhibit will surprise most visitors by illustrating the concept of prospect theory, an idea first proposed in 1979 by the Nobel laureate Daniel Kahneman and his longtime collaborator, the late Amos Tversky (1937–1996).
The questions in the exhibit are similar to the scenarios that were presented to participants in the psychological studies that Kahneman and Tversky used as the foundations of their landmark paper. Insights from prospect theory, especially the human mind’s strong aversion to loss, have powerful applications across a broad range of fields.
Prospect theory illustrates a predictable way that humans tend to make decisions that are inconsistent with their preferences. By understanding this predictable irrationality, we can take concrete steps to better evaluate options that involve risks and rewards in everyday situations such as deciding whether to buy an extended warranty, or finding ways to increase contributions to a retirement savings account.
Further Readings: The Science behind the Exhibit
Human beings tend to be especially averse to losses. The anticipated pain of losing a given amount typically feels about two times worse than the joy of gaining the same amount. As a result, we are especially concerned about potential losses, and the urge to avoid those losses tempts us to take unwise risks. The way that outcomes are presented influences the choices we ultimately make. To think clearly about risk, try reframing losses in terms of gains (and vice versa) to have a more balanced view of your possible outcomes.
- Kahneman, D., & Tversky, A. (1979). Prospect Theory: An Analysis of Decision under Risk. Econometrica, 47(2), 263.
- Barberis, N. C. (2013). Thirty years of prospect theory in economics: A review and assessment. Journal of Economic Perspectives, 27(1), 173–96.
- Chiu, A., & Wu, G. (2010). Prospect theory. Wiley Encyclopedia of Operations Research and Management Science.
- Sussman, A. B. (2017). Valence in context: Asymmetric reactions to realized gains and losses. Journal of Experimental Psychology: General, 146(3), 376–394.
- Allen, E. J., Dechow, P. M., Pope, D. G., & Wu, G. (2017). Reference-dependent preferences: Evidence from marathon runners. Management Science, 63(6), 1657–72.
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