Friday, March 24, 2006

The Framing of Decisions and the Psychology of Choice

The following text is an adaptation of a 1981 Science paper, “The Framing of Decisions and the Psychology of Choice” where Tversky and Kahneman presented a glorious example which delve in the psychology of making a rational decision among seemingly-diverse options.

Imagine the Avian flu disease has now been discovered in Sri Lanka and is expected to kill 600 people. Two alternative programs to combat the disease have been proposed.
1. Under Program A, a projected 200 people will be saved.
2. Under Program B, there is a one-third probability that 600 people will be saved, and a two-thirds probability that no one will be saved.

Which one will you go in for - Program A or B?

The researchers then restated the problem: this time, with -
1. Program C, “400 people will die”
2. Program D, “there is a one-third probability that no one will die, and a two-thirds probability that 600 people will die.”

Now, which one will you go in for - Program C or D?

PS: The authors observations are given in the comments. Please have your answer ready before peeking through the comments

9 Comments:

Blogger Shankar said...

The author's observations :

Case 1 : 72 percent of respondents chose Program A, although the actual outcomes of the two programs are identical. Most subjects were risk averse, preferring the certain saving of 200 lives.

Case 2 : This time, 78 percent chose Program D — again, despite identical outcomes. Respondents now preferred the risk-taking option.

The difference was simply that the first problem phrased its options in terms of lives saved, and the second one as lives lost; people are more willing, apparently, to take risks to prevent lives being “lost” than to “save” lives.

11:13 PM  
Anonymous Anonymous said...

Hello,

Being a trader i would have one for case2.Because you never know:)

Rgds

11:08 AM  
Anonymous aditi said...

Hi,

If i am a small investor what strategy should i apply.I dont understand the mechanism of investement.....i apply for a buy....and then those shares come to my account only after 3-4 days.....and by then the share prices drop below the purchase price......how do people make money in trading?????????how shud i gain from your reco.....

i forgot to tell u that i use icicidirect.com for buying shares......till now my only good decision was to buy reliance shares pre merger...otherwise i have lost everywhere and at all instances......presently i hold the following shares......

GEshipping 100 shares at average of 165

Reliance 50 premerger at average of 885

Hind construction 100 at average of 165

Grasim 15 shares at average price of 1865

sir really i expected alot but didn't gained anything till now...hope you will guide with a decent strategy.....


aditi.

11:12 AM  
Anonymous Rick J said...

I have been following a site now for almost 2 years and I have found it to be both reliable and profitable. They post daily and their stock trades have been beating
the indexes easily.

Take a look at Wallstreetwinnersonline.com

RickJ

4:27 AM  
Blogger Shankar said...

Hi Aditi,

There are all kinds of investors who operate in the share market. A bulk of those investors are the day traders i.e. buy in the morning, sell by evening types. There are others, who are the buy and just hold. And some others, who buy and will sell - when they feel they have got a good price or the stock has become overvalued.

Some insights to your questions -
1. If you donot know anything about investing, you hv two excellent options -
a) Invest in a mutual fund
b) Learn investing.
(I chose opion b) and inspite of having made less money from what an MF would have given me, I hv learnt a lot about the mkt)

2. It takes 3-4 days for the stock to enter your demat account because shares on delivery follow a t+3 cycle i.e. the stock enters your demat 3 days after you trade in them.

3. I truly understand - people invest for good returns. Believe me, investing is all about a certain discipline. You'll gain from practice. If you have time in hand, start with a good book on investing. Research stocks and identify why one stock in a certain sector grows more than the other in the same sector.

Aditi, investing is best, when it is business-like. So if you are putting in 50,000 rupees .. it's like you opening a coffee shop, bookstore with a 50,000 rupee capital. Unfortunately, you can mould the coffee shop/bookstore to your own ideas, which is not possible in the company you are investing in. So you need to research on the growth, value and potential upside of the company.

icicidirect.com has an excellent section on research. I use the same for all these posts.

Warm Rgds
Shankar

11:49 AM  
Anonymous Anonymous said...

Even I started out as a trader lost some/gained some and then realized the 'value' of investing :). Long term is the only way to go.

Cheers,
Sai

9:59 PM  
Anonymous Avinash kochchar said...

Shankar,

You are incorrect for the delivery cycle you mentioned for shares. It follows T+2 cycle and not T+3.



Avinash Kochchar

4:20 PM  
Blogger Shankar said...

Oops ... thanx Avinash

4:55 PM  
Anonymous Rick J said...

I have been following a site now for almost 2 years and I have found it to be both reliable and profitable. They post daily and their stock trades have been beating
the indexes easily.

Take a look at Wallstreetwinnersonline.com

RickJ

7:39 PM  

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