Behavioral Economics · intermediate
What moves on the Prospect Theory Value Function diagram
Value is concave in gains and convex in losses: sensitivity to change shrinks with distance from the reference pointreference pointThe benchmark (often the status quo) against which outcomes are felt as gains or losses..
The curve flattens as gains and losses grow.
The step from $0→$100 feels enormous; $10,000→$10,100 feels like nothing.
That flattening is why we drive across town to save $10 on a $30 book but not on a $3,000 laptop.
Examiners ask this as: diminishing sensitivity, big numbers numb.
Other scenarios on Prospect Theory Value Function