Management Science Application (Paperback) | Released: 08 Feb 2020

Types of Prospect Theory According to Tversky and Kahneman, the certainty effect is exhibited when people prefer certain outcomes and underweight outcomes that are only probable. The certainty effect leads to individuals avoiding risk when there is a prospect of a sure gain. It also contributes to individuals seeking risk when one of their options is a sure loss.The isolation effect occurs when people have presented two options with the same outcome, but different routes to the outcome. In this case, people are likely to cancel out similar information to lighten the cognitive load, and their conclusions will vary depending on how the options are framed.-The prospect theory says that investors value gains and losses differently, placing more weight on perceived gains versus perceived losses. -An investor presented with a choice, both equal, will choose the one presented in terms of potential gains. -The prospect theory is part of behavioral economics, suggesting investors chose perceived gains because losses cause a greater emotional impact. -The certainty effect says individuals prefer certain outcomes over probable ones, while the isolation effect says individuals cancel out similar information when making a decision. Prospect Theory Example Consider an investor is given a pitch for the same mutual fund by two separate financial advisors. One advisor presents the fund to the investor, highlighting that it has an average return of 12% over the past three years. The other advisor tells the investor that the fund has had above-average returns in the past 10 years, but in recent years it has been declining. Prospect theory assumes that though the investor was presented with the exact same mutual fund, he is likely to buy the fund from the first advisor, who expressed the fund's rate of return as an overall gain instead of the advisor presenting the fund as having high returns and losses.How and why behavioral economic method can predict house buyers house purchase need or desire whether the country's house buyers their house purchase need or desire will increase or decrease in the year. I shall explain the reasons as below: Supply-side economists say that increasing business growth, not consumer demand, will boost the economy. They agree the government has a role to play, but fiscal policy should target companies. They rely on tax cuts and deregulation. So, supply-side economists believe that raising house buyers' house purchase or long term renting or instalement payment desires. Government or business organizations will play a important role, e.g. decresing salary tax, banks can charge low interest to encourage many people to borrow much long term loan or money to spend long term expenditure, e.g. buying house. So, it seems that other parties will encourage house buyers' house purchase more more than themselves psychological feeling influence. Otherwise, demand-side economists say that any house buyer individual psychological living need desire is more influential to encourage they choose to buy house in preference. On one hand, in demand-side economists view, I shall apply behavioral economic concept to explain why and how causes house buyer individual house purchase choice in preference than rent choice . On the other hand, in supply-side economists view, I shall apply demand and supply economic concept to explain why and how casues house buyer individual house purchase choice in preference than rent choice in property market.