Market Psychology

Tversky & Kahneman’s 600 lives: both programmes save 200 in expectation. Framed as lives saved, the sure option values at 105.9 against 92.8 for the gamble, so the sure thing wins — 72% chose it in the study. Framed as deaths, the sure loss values at −438.5 against −417.7 for the gamble, so the gamble wins — 78% chose it. Same facts; the reference point moved.

• A frame can carry real information: what a seller chooses to emphasise tells you something about them.
• Effects are strongest in one-off hypothetical choices; experience and incentives shrink them.
• Reframing your own position (“would I buy it at today’s price?”) is a deliberate use of the effect, and a useful one.

def v(x, a=0.88, lam=2.25):                      # prospect theory's value function
    return np.where(x >= 0, np.abs(x) ** a, -lam * np.abs(x) ** a)

# Tversky & Kahneman (1981): 600 lives at stake, the same two programmes described two ways
saved_sure, saved_gamble = v(200), (1 / 3) * v(600)        # "200 will be saved" vs "1/3 chance all 600 are saved"
die_sure, die_gamble = v(-400), (2 / 3) * v(-600)          # "400 will die" vs "2/3 chance all 600 die"
expected_saved = (200, 600 / 3)

Assumes import numpy as np and import pandas as pd. Each snippet carries its own example numbers; the comments say which are made up.