What Is Teoria del prospetto?
Teoria del prospetto, widely known in English as Prospect Theory, is a foundational theory in behavioral finance that describes how individuals make choices under risk and uncertainty. Unlike traditional economic theories that assume rational decision making based on maximizing expected value or utility, Teoria del prospetto posits that people evaluate potential outcomes relative to a reference point and are more sensitive to losses than to equivalent gains. This difference in perception, known as loss aversion, is a central tenet of the theory and profoundly influences financial behavior.
History and Origin
Teoria del prospetto was introduced in 1979 by psychologists Daniel Kahneman and Amos Tversky through their seminal paper, "Prospect Theory: An Analysis of Decision Under Risk."11 Prior to their work, utility theory, particularly expected utility theory, was the dominant model for understanding how individuals made choices involving risk. However, Kahneman and Tversky observed that people's actual choices often deviated systematically from the predictions of expected utility theory.10 Their research, which garnered Daniel Kahneman a Nobel Memorial Prize in Economic Sciences in 2002 (Amos Tversky had passed away earlier), established a new paradigm by integrating insights from psychology into economic theory. This pioneering work laid much of the groundwork for the modern field of behavioral economics, demonstrating that investor psychology and cognitive biases significantly influence financial decisions.
Key Takeaways
- Reference Dependence: Individuals perceive outcomes as gains or losses relative to a specific reference point, which can be their current wealth, a purchase price, or an expectation.
- Loss Aversion: The psychological impact of a loss is generally greater than the impact of an equivalent gain. People feel more pain from losing a certain amount than pleasure from gaining the same amount.
- Diminishing Sensitivity: The marginal impact of both gains and losses decreases as their magnitude increases. For example, the difference between gaining $10 and $20 feels more significant than the difference between gaining $1,000 and $1,010.
- Probability Weighting: People tend to overweight small probabilities and underweight moderate to high probabilities. This can lead to exaggerated responses to unlikely events and a diminished response to highly probable ones.
- Framing Effect: The way in which a choice problem is presented (or "framed") can significantly influence an individual's preference, even if the underlying options are objectively identical.9
Interpreting Teoria del prospetto
Teoria del prospetto suggests that individuals do not make decisions solely on objective probabilities and outcomes. Instead, they frame situations based on their subjective experiences and knowledge, leading to systematic deviations from what standard economic models might predict.8 Central to interpreting Teoria del prospetto are the concepts of the value function and decision weights. The value function, often depicted as an S-shaped curve, illustrates diminishing sensitivity for both gains and losses. It is typically concave for gains, reflecting risk aversion in the domain of gains, and convex for losses, implying risk seeking behavior when faced with sure losses.7 Decision weights are subjective probabilities that individuals assign to outcomes, which can differ significantly from actual objective probabilities, particularly for low and high probability events. This indicates that perceived likelihoods, rather than actual likelihoods, guide choices, influencing how people respond to potential profits or setbacks in financial markets.
Hypothetical Example
Consider an investor, Maria, who bought shares of Stock A at $100. Due to market fluctuations, Stock A's price drops to $70. Maria is now faced with a decision: sell the stock and realize a $30 loss, or hold it in hopes of a rebound.
According to Teoria del prospetto, Maria's reference point is her initial purchase price of $100. She perceives the current $70 price as a $30 loss. Due to loss aversion, the pain of this $30 loss is psychologically more impactful than the pleasure she might have felt from a $30 gain. This bias might lead her to become risk-seeking in the domain of losses. Rather than rationally cutting her losses, she might hold onto the stock, or even buy more, hoping for it to return to $100 to avoid realizing the "certain" loss. This behavior, known as the disposition effect, illustrates how the theory manifests in investment choices.
Practical Applications
Teoria del prospetto has profound practical applications across finance and economics, offering insights into various heuristics and biases that affect financial behaviors. It explains why investors might hold onto losing stocks for too long (due to loss aversion and a desire to avoid realizing a loss) or sell winning stocks too soon (to lock in a gain, even if future prospects are good). This understanding is crucial for portfolio management strategies, enabling advisors and investors to anticipate and potentially mitigate the impact of behavioral biases on investment returns.6 For instance, financial advisors can use the principles of Teoria del prospetto to help clients understand their own risk preferences and potential irrational tendencies, guiding them towards more disciplined financial decision-making. It also informs the design of financial products, regulations, and educational programs aimed at fostering more rational investor behavior.5
Limitations and Criticisms
Despite its widespread acceptance and empirical support, Teoria del prospetto is not without limitations and criticisms. One common critique is that the theory is primarily descriptive, focusing on how people make decisions rather than providing a prescriptive model for optimal choices.4 Critics also point out that the theory's parameters (e.g., the exact shape of the value function or the probability weighting function) can vary significantly across individuals and contexts, making precise predictions challenging in real-world scenarios.3 Furthermore, some argue that Teoria del prospetto, while adept at explaining individual decision-making, may not fully account for decisions made in groups or organizations, or for the long-term consequences of intertemporal trade-offs.2 It has also been suggested that the theory is overly complex and might not investigate the full range of information processing during choices, particularly in complex financial situations beyond simple gambles.1
Teoria del prospetto vs. Teoria dell'utilità attesa
Teoria del prospetto (Prospect Theory) fundamentally differs from Teoria dell'utilità attesa (Expected Utility Theory) in its underlying assumptions about human rationality and decision-making under risk. Expected Utility Theory, the classical model, posits that individuals are rational actors who make choices to maximize their overall expected utility, weighing outcomes by their objective probabilities. It assumes that wealth is the primary determinant of utility and that the utility function is generally concave, implying consistent risk aversion. In contrast, Teoria del prospetto argues that individuals' decisions are not solely driven by objective probabilities and final wealth states, but rather by perceived gains and losses relative to a reference point, and that the psychological impact of losses is greater than gains. This leads to observed inconsistencies, such as individuals being risk-averse for gains but risk-seeking for losses, a phenomenon not easily explained by Expected Utility Theory. Teoria del prospetto provides a more psychologically realistic framework for understanding observed human behavior, particularly in the presence of cognitive biases.
FAQs
What is the core idea of Teoria del prospetto?
The core idea of Teoria del prospetto is that individuals evaluate potential outcomes of decisions in terms of gains and losses relative to a specific reference point, rather than in terms of absolute final wealth. Crucially, people tend to feel the pain of a loss more intensely than the pleasure of an equivalent gain, a concept known as loss aversion.
How does Teoria del prospetto explain irrational financial decisions?
Teoria del prospetto explains seemingly irrational financial decisions by highlighting how psychological factors influence choices. For example, it suggests that investors might hold onto losing investments (demonstrating risk seeking in the domain of losses) because the desire to avoid realizing a loss outweighs the rational decision to cut losses. It also explains why the way a choice is framed can alter preferences, even if the underlying options are identical.
Who developed Teoria del prospetto?
Teoria del prospetto was developed by Israeli psychologists Daniel Kahneman and Amos Tversky. Their groundbreaking research in the late 1970s challenged conventional economic models and significantly contributed to the emergence of behavioral economics as a recognized field.
Is Teoria del prospetto applicable outside of finance?
Yes, while highly influential in finance, Teoria del prospetto has broad applicability across various fields, including marketing, public policy, health decisions, and legal judgments. Its insights into human decision making under uncertainty are relevant wherever individuals face choices involving potential gains and losses.
What is the "value function" in Teoria del prospetto?
The value function in Teoria del prospetto describes how individuals subjectively value gains and losses. It's typically an S-shaped curve that is concave for gains (reflecting diminishing sensitivity to increasing gains) and convex for losses (reflecting diminishing sensitivity to increasing losses, but with a steeper slope, illustrating loss aversion). This function is centered at the reference point.