Prospect Theory: Reference—Dependent Decision—Making

Abstract

In the previous chapter we have argued that decision-making is an evolutionary process of preference construction rather than static preference revelation and that this process is contingent on the subjective definition of the situation, the frame (itself being adopted within the decision process). Any descriptive decision theory therefore has to take into account that (a) the factual attributes of alternatives in the choice set and the decision maker’s subjective representation of them do not necessarily have to correspond, that (b) choice alternatives are related to a reference system in order to evaluate them rather than being absolute, and that (c) one and the same decision problem may be treated differently depending on the frame adopted.