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25.Bernoulli'Errors - Coggle Diagram
25.Bernoulli'Errors
Prospect Theory 📊
Key Concept:
- Risk-averse for gains, risk-seeking for losses.
- People tend to avoid risks when a gain is guaranteed, but take risks to avoid losses.
Impact:
- Explains behaviors like loss aversion.
- Challenges traditional theories of rationality in decision-making.
Traditional Theories ⚖️
Expected Utility Theory:
- Assumes people make decisions rationally, maximizing utility.
Critique by Kahneman:
- System 1 leads to non-rational decisions.
- People don’t always act according to expected utility theory due to biases.
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The Role of Intuition 💡
System 1:
- Quick, automatic thinking.
- Often used in familiar or repetitive situations.
System 2:
- Deliberate, effortful thinking.
- Engaged when intuition needs verification or in new situations.
Key Takeaways 📚
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Cognitive Biases:
- Be aware of biases like optimism, overconfidence, and status quo bias when making decisions.
Prospect Theory:
- Loss aversion explains why people may take risks to avoid losing rather than gaining.
System 1 vs. System 2:
- System 1 drives fast, intuitive decisions, but System 2 is needed for more thoughtful, rational choices.