A New Look at Prospect Theory


Saint Paul


Hey there. I was just thinking — PRL readers are the best.

This past weekend I emailed about Mindset and letting Reality flow—

“Don’t force a round peg into a square hole” kinda thing (actually it was exactly that).

Anyway, one Mr. Haris P. wrote back to agree:

Mindset is everything, you are right. When I get stressed I stop and think of the Prospect Theory that has been fascinating me since I first read it some years ago.  To make a long story short, we always judge situations comparing to something else (point of reference).

When I am stressful at work for example, I stop and think how is my life, what are the real things I value (family, friends and health basically). Suddenly all other issues seem unimportant and trivial. Everything has a solution (apart form health problems) so I should just carry on, find the strength and courage to face my hesitations and fears.

In a few words, I change the mindset and everything seems crystal clear.

Second off, I agree completely with Haris.

Perspective, framing, and contrast all help us to see the situation and get a handle on our emotions and mindset.

But backing up to First off… my immediate reaction was whoa. I hadn’t thought of Prospect Theory quite like that before.

My personal notes on Prospect Theory
My personal notes on Prospect Theory from Thinking, Fast and Slow

Prospect Theory tells us how people act (or react) in the face of risk. When you have the option of a sure win, you tend to be risk averse. You don’t want to gamble.

And when you’re pretty sure things aren’t going to work well, you’re more willing to take big risks…

Hoping for the Best!

Prospect Theory was devised by Daniel Kahneman and Amos Tverski. I learned about it in one of my favorite books, Thinking, Fast and Slow.

The way I’ve looked at Prospect Theory in the past is how people act in the face of risk, like i described above.

Our man Haris brought it into a new light for me.

When we’re feeling stressed, we’re not thinking clearly — foolishly acting on emotions and putting ourselves in that category where

things aren’t going to work out,

might as well bet the farm!

Fact is, that’s rarely the case. Things generally do work out —maybe not how we expected— so long as we don’t muck ’em up worse.

When you recognize that events happen outside of our control, you can play it cool. You’re able to pull yourself out of the despair and risky (emotional) behavior, and see where they lead.

Good stuff. I like this new twist on the Prospect Theory of risk and reward.

You can find Thinking, Fast and Slow here if you’re interested. I highly recommend it.

thinking-fast-slowThanks Haris for the note!

Stay cool dear reader,