Essays on The Relevancy of the Prospect Theory Term Paper

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The paper "The Relevancy of the Prospect Theory" is a brilliant example of a term paper on marketing. Prospect theory is the critique made on the utility theory to create a descriptive model that is an alternative model in decision making for risk management. This theory was discovered by Kahneman in collaboration with Tversky who discovered that the majority of the people underweight outcomes are simply probable when it comes to comparison with the results received with certainty. The theory also states that people normally discard components that are shared by the entire prospects into consideration (Gonzalez1676– 9). However, in prospective theory a certain value is allocated to gains as well as losses instead of the final assets and the probabilities are reinstated by the decision weights.

The operating value is stated on deviations at a given reference point which is generally in concave shape for risk aversion or gains and in a convex shape to represent risk-seeking or losses, the losses are steeper than gains. This means that decision weights are normally below unlike with the corresponding probabilities which are always high as illustrated below; Fig.

Hypothetic value operation Fig. Weighting functions gain (w+) and losses (w+) The good side of Prospect theory Prospect theory is considered to have challenged the normal alternative approach. This is particularly indicated in the challenge for notion invariance since the description of the option need not affect the results of the choice made. The theory was created by several psychologists such as; Tversky and Kahneman and it is doing the very pretty good duty of clarifying the several situations that the normal utility theory presents the wrong predictions Lattimore & Baker (1992, p.

377– 400). The bad side of Prospect theory The major idea is that the implementation of the information security measures or programs is very hard and in most cases a gamble. Such difficulties twist the decision-making procedures for the business. This causes a negative impact on the information security experts as they are regularly left outside the easy business reason and economic principles. The information security professional challenge involves how the problem of Prospect theory can be managed in an organization. The challenge requires the usual fiscal attention and people being risk loving in discussing the likely impact of security limitations.

To a larger extent, compliance with the rules has greatly forced several private sectors to unwillingly invest in some risk management as well as mitigation programs. However, several organizations still need to be convinced yet the prospect theory states that selling the risk aversion idea in the loss-focused situations will definitely not work. The relevancy of the Prospect theory The prospect theory illustrates very vital milestone, Kahneman in collaboration with Amos have proved in their several experiments that the everyday reality among decision-makers changes depending on the assumptions maintained by the economists.  

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