Bernoulli's Errors Because of the Book Report

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Chapter 27

This chapter examines the "Endowment Effect." The reference points needed for prospect theory tend to be missing in common methodologies of analysis. An indifference curve does not allow such complicated factors to be present in the evaluation. Yet, this is a crucial element of one's decision making, especially when it comes to dealing with financial gambles. The chapter looks at Thaler's endowment effect. Here, we are more inclined to be stronger in our responses to worse aversions, rather than our responses to bigger gains.

Chapter 28

It is clear that loss aversion has a huge impact on behavior in an economic context. Part of this is a biological mechanism meant for survival. Our brains "give priority to bad news," as many other animals do around us as well. Threats are always responded to faster than any other possibility because of our desire to survive rooted in our primitive natures.

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This is even the case for symbolic threats that could harm us emotionally. The fact that negativity dominates helps explain the power of loss aversion in decision making. Thus, humans act stronger to avoid losses than to achieve goals or gains. This makes it possible for reference points to be seen as goal and objectives, which also fits into the idea that the reference point is not fixed, but is movable.

Chapter 29

Chapter 29 examines what the author calls the "Fourfold Pattern." Essentially, how we weigh assessments depends on a deliberate agenda or conscious decision. The author explains how we can see similar changes in percentages differently because of their numeric value. When the chance goes from 0% to 5% there opens up a possibility of a win, while a.....

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