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Prospect Theory Essay

  • Submitted by: poo91ontherocks
  • on September 3, 2013
  • Category: Psychology
  • Length: 271 words

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Below is an essay on "Prospect Theory" from Anti Essays, your source for research papers, essays, and term paper examples.

Prospect theory application in Credit cards
Prospect theory was developed by Nobel prize winning psychologist Daniel Kahneman and his colleague Amos Tversky to explain how people make decisions, particularly in the face of risk. It is one of the most direct and strong applications of psychology to business because of the solid research basis.   Prospect theory states that means consumers are risk-seeking if losing, but are risk-averse if we winning. Another way to think of it relates to selling stocks: We sell quickly when we earn profits but don’t sell if we are have losses.                                                                                                                                         The theory rests on the idea that losses are more hurtful than gains are pleasurable. Many studies conclude that losses are about twice as painful as gains are enjoyable.
Consumer Behavior with respect to credit cards:                                                                                           When paying with a credit card, the brain doesn’t quite understand what is happening when the purchase was made with a credit card. When you pay with cash you are giving up something tangible to purchase an item. You are losing something (your cash) to gain something (your purchase.)                                                                                                                                                                           In order to make the purchase, your perceived gain must be substantially higher than the perceived loss. Thus, when you pay with cash you are far more likely to make fewer purchases and will spend less money. The pain of the cash leaving your pocket hurts more than the pleasure you would get from making a particular purchase.                                                                                                                                                           While paying with cash, consumers...

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