PROSPECT THEORY REVISITED: INVESTIGATING THE APPLICABILITY OF A REVISED VALUE FUNCTION ON DECISIONS THAT BENEFIT THE SELF OR OTHERS

Abstract

Prospect Theory (Kahneman and Tversky, 1979) is a highly influential theory that predicts decision making when people are confronted with choices involving gains or losses with different degrees of uncertainty.Prospect Theory argues that people are generally risk averse when it comes to seeking gains and risk seeking when it comes to seeking losses.Leddo et al. (2019) noted that the original formalization of Prospect Theory did not take into account people's goals.They argued that people would be willing to take risks to achieve goals but become more risk averse once those goals are achieved, and they would become risk averse when confronted with losses in order to avoid a highly negative outcome but become more risk seeking to negate the negative outcome once it occurred.Leddo et al.'s research confirmed this hypothesis, leading to a revision of Prospect Theory's value function.The present research investigates whether the same revised value function can predict recommendations people make on behalf of others in addition to decisions made on behalf of oneself.80 high school students were presented with scenarios requiring a choice of what standardized test to take to achieve or avoid losing admission to colleges.Gain scenarios depicted students either at or below a score needed to gain acceptance to a dream school.Loss scenarios depicted students either above or at a score that would cause them to lose out on college admission.In half the scenarios, students had to decide which standardized test they would take; in the other half, students had to decide which standardized test to recommend to a friend.Results showed that students made recommendations to their friends that were virtually identical to the decisions they made for themselves.The decisions themselves were consistent with predictions made by Leddo et al.'s (2019) revised value function, namely that high schoolers were more risk seeking when existing test scores were below the requirements of dream colleges than they were when existing scores were at the requirements and that they were more risk averse when existing test scores were in danger of falling to a level that would eliminate chances for getting into college than there were

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