By Ziegler A.

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In the case of strictly positive or negative prospects, the overall value of the prospects consists of the value of the riskless component and the value difference between the outcomes multiplied with the probability weight of the more extreme outcome. Hence, a decision weight is applied only to the value difference and not to the riskless component of the prospect. 3 The Value Function In sharp contrast to (expected) utility theory, prospect theory assumes that "the carriers of value are changes in wealth or welfare, rather than final states" (Kahneman & Tversky, 1979, p.

1. Mr. A was given tickets to lotteries involving the World Series. He won $50 in one lottery and $25 in the other. Mr. 8 was given a ticket to a single, larger World Series lottery. He won $75. 2. Mr. A received a letter from the IRS saying that he made a minor arithmetical mistake on his tax return and owed $100. He received a similar letter the same day from his state income tax authority saying he owed $50. There were no other repercussions from either mistake. Mr. 8 received a letter from the IRS saying that he made a minor artihmetical mistake on his tax return and owed $150.

Examine the left side of the figure for a short while. It is a slightly modified version of the famous Miiller-Lyer illusion. Most people who do not know the Miiller-Lyer illusion would hold that the top line was a bit longer than the bottom line, although both are in fact of the same length. On the right side of the figure both objects are embedded in a dashed frame, elucidating that the lines actually are of equallength. 33 Fig. 2. Miiller-Lyer Illusion In this context it is worth mentioning that our reference systems are assumed to be inconspicuous, that is, we generally are not aware of the fact 32 33 For further examples of perceptual illusions, taken from life, see Thaler (1983).

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