Risk and Gain

“In the book that Pallop was reading by Kahneman and Tversky, for example, there is a description of a simple experiment, where a group of people were told to imagine that they had $300. They were then given a choice between (a) receiving another $100 or (b) tossing a coin, where if they won they got $200 and if they lost they got nothing. Most of us, it turns out, prefer (a) to (b). But then Kahneman and Tversky did a second experiment. They told people to imagine that they had $500 and then asked them if they would rather (c) give up $100 or (d) toss a coin and pay $200 if they lost and nothing at all if they won. Most of us now prefer (d) to (c). What is interesting about those four choices is that, from a probabilistic standpoint, they are identical. Nonetheless, we have strong preferences among them. Why? Because we’re more willing to gamble when it comes to losses, but are risk averse when it comes to our gains. That’s why we like small daily winnings in the stock market, even if that requires that we risk losing everything in a crash.”

Gladwell, Malcolm. “What the Dog Saw”

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