• Rational Decisions
- Prospect theory stipulates that people can make decision that are rational but do not maximize utility – decisions based on fairness is an example of this
o Gains and losses can depend on the status quo and people tend to place a higher emphasis on gains (people are aversive to losses even when utility is not maximized)
o The expected utility hypothesis is, therefore, often not reliable
Expected utility formula = pU(Wa)+(1-P)U(Wb)