Chapter 2: Literature Review
2.6. Theoretical framework
2.6.2. Prospect theory
The prospect theory has been coined and developed by Kahneman and Tversky in the 70’s, with the primary intention of addressing deficiencies or shortcomings posed by the Subjective expected utility theory and to provide an alternative theory or approach (Kahneman &
Tversky, 1975; Mowrer & Davison, 2011). This theory offers a clear account on risky decision making, such as decisions which are often labelled as unreasonable or irrational, stupid and risky (Umeh, 2009).
For example, it would seem unreasonable for individuals to continue to consume alcohol despite its grim effect on one’s health. The prospect theory, according to Aliev et al. (2012), is one of the most well-known theories and it is successful because it incorporates psychological traits which contribute to the formation of human behaviour.
The utility model of the prospect theory was constructed from a number of discovered features of human behaviour in decision making by Kahneman and Tversky (1975). These features are cognizant of the fact that: people make decisions based on gains and losses instead of the final wealth; humans have stronger reactions to losses as opposed to gains; probability weights rather than objective probabilities are usually used when making decisions under risk (Aliev et al., 2012). The decision process within this theory can be described in two segments:
framing and evaluation (Umeh, 2009). These two processes will unfold in the next sections.
2.6.2.1. Framing
The prospect theory was developed with the intent of explaining framing effects in decision making, as one of its mandate (Kahneman & Tversky, 1975; Mishra & Fiddick, 2012). It suggests that people display framing effects because the rate of increase in utility resulting from gains is sharply diminishing: for example, gaining R100 is subjectively more valuable if one had no money at first than if one had R10, 000; however, with regards to losses, the utility shrinks more quickly, thus people will engage in risky behaviour in order to prevent any further experience of loss (Mishra & Fiddick, 2012). According to the prospect theory, decision making under risk may be perceived as a choice between gambles or prospects (Kahneman & Tversky, 1975). Whereby, low probability events are highly considered and high probability events are less considered in simple gambles.
On one hand, people have a tendency of estimating that they stand a good chance of experiencing a low probability event than they actually are, like winning the lottery. On the other hand, it means that they will estimate that they do not stand a good chance of experiencing the high probability event, like using drugs and loss of health (Mowrer & Davidson, 2011). As such, the manner in which options appear or are presented to an individual (that is, framed: gain or loss, high or low probability) determine or influence the type and nature of a decision that will be taken by the individual, the choice can either be regarded as rational or irrational (Umeh, 2009).
More often, accepted options are those that are framed or conceived in a positive rather than a negative manner (Kahneman & Tversky, 1975; Umeh, 2009).
Framing can take various forms, like decision makers often consider things that are more important to them, prior to any acceptance of behaviour or available options (Umeh, 2009).
These important things according to Byrnes (2002 in Umeh, 2009) are: maintaining a good health, securing a more reliable and permanent Job, and maintaining good relations with family and friends. These various and random forms of framing aid with the simplification of the problem at hand because people work out which outcomes are gains from those that are losses in relation to a certain point of reference, and focus on unique distinguishing factors from other alternatives (Kahneman & Tversky, 1975). Overall, the advantages of framing are described by Umeh (2009) as follows:
Framing enables the decision maker to identify feasible options, in cognizant of contextual factors that influence and shapes the choices at the disposal of an individual, that is, political, social, environmental, cultural, intellectual and economic consideration.
Framing assists individuals to simplify otherwise complex information which yields an easy and manageable decision making process.
2.6.2.2. Evaluation
There are similarities to what transpires within the Subjective expected utility theory and the evaluation phase of the prospect theory, except that the evaluation phase considers the attitude of individuals towards certainty and uncertainty of outcomes in order to consolidate for the value assigned to each possible outcome (Umeh, 2009). The prospect theory presumes that people’s decisions are to a large extent influenced by the subjective values they place on outcomes (Mowrer & Davidson, 2011).
These subjective values induce a change that brings imbalance in the perception of equivalent events; hence losses are easily accepted more than gains. Moreover, people have the tendency to assign more weight or emphasis on certain or guaranteed outcomes than in uncertain or probable outcomes (Umeh, 2009).
According to Umeh (2009), people have serious challenges dealing with extreme probabilities because the idea of chance is often despised. Therefore, events that are most likely to occur are viewed as certain or guaranteed, while those events that are less likely to occur are considered as impossible (Mowrer & Davidson, 2011).
This distortion lends a hand in why people engage in unreasonable or pointless risk-taking behaviour. However, what is gain for one person might not necessarily mean the same for the other; it can either be seen as loss or nothing for the other (Umeh, 2009). That is why adolescents often view their risk-taking behaviour as fun or not problematic instead of seeing it as risky. For example, engaging in unsafe sex practice would mean love for young lovers, whilst an adult couple could see it as a serious health risk.
It is imperative to note that the concept of certainty is fundamental in understanding the prospect theory, because people’s different attitudes and attributes about certainty and uncertainty can distort an otherwise rational decision making process (Kahneman & Tversky, 1975; Mishra & Fiddick, 2012). For example, the certainty of achieving a heroic status and respect amongst peers is what drives many adolescents to take part in train surfing despite how dangerous it may be, because they believe that there is a low probability of them being hurt in the process.
The inclination for certainty is mediated by either bad or good circumstances (Kahneman
& Tyversky, 1975; Umeh, 2009). That is, people are generally more cautious (risk averse) in good situations but take more risk (risk seeking) in bad situations (Mowrer & Davidson, 2011).
In simple terms, people have a propensity to keep what they have (or what is guaranteed) than to take risks for something that is not guaranteed (Umeh, 2009). For example, teenagers choose to experiment with smoking, drugs and alcohol because they are guaranteed a sense of belonging amongst their peers and a satisfied curiosity. On the contrary, the merits of not smoking because of notably reduced susceptibility to long-term health is usually ignored, despite its vital role in maintaining ones’ good health because it is seen as vague and uncertain.
When dealing with losses, people have a tendency to accept or choose uncertain loss over a certain one, even if the certain loss is of minimal significance (Mishra & Fiddick, 2012; Umeh, 2009). That is, people are inclined to take more risks (that is, they are risk seeking) when faced with situations that poses potential losses. For example, people tend to engage in unprotected sexual practices because they think the risks or chances of contracting STI’s and unplanned pregnancy seem uncertain. On the contrary, the risks of using contraception and practicing safe sex usually comes with guaranteed embarrassment, interruption, sense of distrust, and reduced spontaneity irrespective of how less disastrous it may be; it seems almost guaranteed to occur.
This certainty is what drives many adolescent to engage in unsafe sex practice because they also reason that the consequences might not happen to them and will take their chances than being embarrassed (that is, they prefer the uncertain outcomes).