As for the future, our task is not to forecast it, but to enable it
Antoine de Saint-Exupéry
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The Prospect Theory and it's context

Perspective theory

Daniel Kahneman, Nobel price in economics in 2002, dedicated his life in cataloging the functioning of mankind with respect to economic decisions. He did not develop a grand theory which he would have tried to confirm afterward. He looked for and found what is !

His book "Thinking, fast and slow" summarizes in a readable form his research. It documents the two ways of thinking of mankind:

  • There is on one side an immediate way of thinking in which we decide on the basis of pre-established biases and principles. We spend the major part of our conscious life in this thinking mode. To Daniel Kahneman, the great strength of man is to be able set up these intelligent biases which permit to react instantly in face of danger.

    Just imagine a man would have to think for five minutes in face of a wolf...

    And thus Daniel Kahneman found the prospect theory. Which can be very summarized as follows:

    • In face of an inprobable but important risk, the homo oeconomicus will tend to pay a lot to get rid of this risk. Which explains why people subscribe to fire insurances to get rid of the fire risk. This a rational behavior

    • On the other side, in face of an important nearly-certain loss, the homo oeconomicus refuses to cut his losses. It is the position of a debt-holder who gives again money to his debtor hoping that thus he will get back an irrecoverable debt. In face of this unacceptable loss, the homo oeconomicus wants and succeeds to believe that the normal state, the reference state, is the highly improbable situation where he will be fully reimbursed. And to preserve this belief, he takes insane additional risks.

      This automatic programmation of the human being does also explain many heroic deeds.

    Which explains why we tend to run into disasters, without reason and our eyes wide open.

  • There is also a slow way of thinking during which we are more critical, more doubting and more able to question our fast way of thinking. This slow and hesitant thinking mode permits us to change.