PROSPECT THEORY

KEY CONCEPTS

• The Prospect Theory was developed by Daniel Kahneman and Amos Tversky in 1979.

• In traditional economics there is a theory called expect utility theory, which would model the decision that perfectly rational people would make after completing a cost benefit analysis to determine whether the action is worth pursuing for the best possible outcome.

• Unfortunately, we are not all rational all of the time.

• The field of Behavior Economics was developed to better understand and describe what humans would actually do when making decisions under particular circumstances, knowing that they don’t act completely rationally.

• Therefore, contrary to the expected utility theory (which models the decision that perfectly rational people would make), the prospect theory aims to describe the actual behavior of people.

• The Prospect Theory describes how individuals perceive and assess losses versus gains (Kahneman and Tversky, 1979).

• Studies showed that the pain of losing is twice as powerful as the pleasure of gaining.

• For example, for some individuals, the pain from losing $20 is twice as much of the pleasure of finding $20 (an equal gain in value). The loss of $20 could only be compensated by the pleasure of gaining $40.

• Therefore, individuals prefer to avoid losing because of this perception.

• Loss aversion is defined as the tendency to prefer avoiding losses to acquiring equivalent gains.

APPLYING IT TO NUTRITION & HEALTH

Even though an individual may have a strong desire to improve their overall health, if they only see making healthy changes as a series of losses (i.e. losing their favorite foods, beverages, and activities) they may have a harder time stopping these habits to create long term behavior changes.

When we as counselors or educators focus on dieting, restricting and reducing an individuals favorite foods or habits, we are fighting against an individual’s nature to avoid losing. We can take advantage of how our brains work and try to make it easier for us to make healthy changes by helping our clients to perceive the changes they are making as gains.

Your solution as a counselor would be to create a least 2 to 1 positive ratio of healthy changes. Have your client ADD 2-3 good healthy behaviors to every 1 decrease or subtraction of an unhealthy behavior that they enjoy.

REFERENCE:

Kahneman, D., & Tversky, A. (1979). Prospect theory: An analysis of decision under risk. Econometrica, 47, 263-291.

Kahneman, D. (2011). Thinking, fast and slow. Farrar, Straus and Giroux.