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p. 495. Risky choiceslocked

  • Michelle Baddeley

Abstract

When we decide to cross the road, buy a lottery ticket, or invest our money, the decision involves risk and uncertainty. ‘Risky choices’ looks at how economists usually think of risk as quantifiable—in the form of expected utility theory—but behavioural economists challenge this understanding of risk. Daniel Kahneman and Amos Tversky developed prospect theory, which could incorporate the anomalous behaviour identified by the Allais and Ellsberg Paradoxes. They argued that any decision-making theory should be able to explain the certainty, reflection, and isolation effects. Alternatives to prospect theory include Richard Thaler’s mental accounting model and the regret theory of Graham Loomes and Robert Sugden.

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