Question 1

What is the difference between objective and subjective value of currency?

Accepted Answer

Objective value is determined by the market and represents the actual exchange rate of currency. Subjective value is the psychological worth a person assigns to money based on context, such as purchase size and potential savings. For example, saving two dollars on gas might seem worth an extra trip, but saving the same amount on a car purchase typically does not.

Question 2

Who developed Prospect Theory and why is it important?

Accepted Answer

Daniel Kahneman and Amos Tversky developed Prospect Theory in the 1970s to explain how people psychologically value currency and make economic decisions. Kahneman received the Nobel Prize in Economics in 2002 for this work, which demonstrated that subjective value depends on whether losses or gains are involved and the overall transaction size.

Question 3

How do survey questions in Prospect Theory experiments use gambles?

Accepted Answer

Participants choose between options involving theoretical monetary gains or losses with different probabilities. In gain scenarios, participants decide whether to keep money won or risk it for a higher amount. In loss scenarios, they choose between paying a debt or risking a greater loss. Both options have the same expected value, allowing researchers to measure subjective psychological value.

Question 4

What sample size and timeline are recommended for Prospect Theory surveys?

Accepted Answer

Distribute surveys to between 50 and 100 randomly selected participants, who can be tested individually or in groups. Allow approximately 15 minutes for participants to complete roughly 20 questions. Include a cover page with informed consent explaining that participation is voluntary and responses are anonymous.

Question 5

What patterns do researchers typically find when analyzing Prospect Theory data?

Accepted Answer

Analysis reveals that participants overestimate the subjective value of monetary losses, especially small ones, viewing them as worth more than their objective values. Participants are more likely to take risks to avoid losses than to pursue equivalent gains. Additionally, subjective value of gains decreases when larger sums are involved, showing context-dependent decision-making.

Question 6

How can Prospect Theory research be applied to real-world behavior?

Accepted Answer

Prospect Theory studies help researchers understand gambling addiction by connecting high subjective value of losses to persistent gambling despite mounting debts. Researchers pair surveys with functional MRI to identify brain regions involved in assigning subjective values. Marketing strategies also use Prospect Theory by offering perceived discounts on lower-priced items that consumers assign high subjective values to.

Question 7

What makes the dependent variable in Prospect Theory experiments measurable?

Accepted Answer

The dependent variable—subjective value of currency—is measured by calculating the percentage of participants choosing each option in survey questions. By varying probabilities and monetary amounts across questions and comparing participant preferences in similar scenarios, researchers can apply perspectives on cognitive psychology to quantify how psychological factors influence perceived value independent of actual market value.

A	B
[4000,1]	[5000, .9]
[-4000,1]	[-5000, .9]
[5,1]	[10, .9]
[-5,1]	[-10, .9]
[5000, .9]	[10,000, .45]
[5000, .04]	[10,000, .02]

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