Search results

This chapter explores Prospect Theory — a descriptive model of modelling individual choice making under risk and uncertainty, and its applications to a range of travel behaviour contexts.

The chapter provides background on Prospect Theory, its basic assumptions and formulations, and summarises some of its theoretical developments, applications and evidence in the field of transport research.

A body of empirical evidence has accumulated showing that the principle of maximisation of expected utility provides limited explanation of travel choices under risk and uncertainty. Prospect Theory can be seen as an alternative and promising framework for travel choice modelling (although not without theoretical and practical controversy). These findings are supported by empirical observations reported in the literature reviewed in this chapter.

The chapter provides a detailed account of the design and results of accumulated research in travel behaviour research that is based on Prospect Theory’s observations, insights and formulations. The potential of Prospect Theory for particular decision-making in travel behaviour research is articulated, main findings are presented and discussed, and limitations are identified, leading to further research needs.

We take Cumulative Prospect Theory (CPT) seriously by rigorously estimating structural models using the full set of CPT parameters. Much of the literature only estimates a subset of CPT parameters, or more simply assumes CPT parameter values from prior studies. Our data are from laboratory experiments with undergraduate students and MBA students facing substantial real incentives and losses. We also estimate structural models from Expected Utility Theory (EUT), Dual Theory (DT), Rank-Dependent Utility (RDU), and Disappointment Aversion (DA) for comparison. Our major finding is that a majority of individuals in our sample locally asset integrate. That is, they see a loss frame for what it is, a frame, and behave as if they evaluate the net payment rather than the gross loss when one is presented to them. This finding is devastating to the direct application of CPT to these data for those subjects. Support for CPT is greater when losses are covered out of an earned endowment rather than house money, but RDU is still the best single characterization of individual and pooled choices. Defenders of the CPT model claim, correctly, that the CPT model exists “because the data says it should.” In other words, the CPT model was borne from a wide range of stylized facts culled from parts of the cognitive psychology literature. If one is to take the CPT model seriously and rigorously then it needs to do a much better job of explaining the data than we see here.

Purpose – This chapter examines the impact of oil price volatility on domestic political stability in a key supplier state.

Methodology – This chapter uses prospect theory to analyse socio-political instability based on significant changes in a supplier state's largest revenue source. Prospect theory posits that decisions are framed around a pivotal reference point which may or may not correspond to the status quo, but which nonetheless directly affects risk appetite. This analysis uses Iran as a case study, and relative oil price as the reference point to analyse risk-acceptant decision-making surrounding the 2009 Presidential election.

Findings – Dramatic economic context could be a contributing factor to risk-acceptant behaviour in domestic politics. Specifically, volatile price swings in Iran's main source of income, oil, which contributes over 80 per cent in direct and indirect revenue, and perceived external decline therein, may have been a destabilising factor. Combined with loss aversion, this context may have facilitated measures beyond those dictated by rational utility calculus to secure conservative rule in the 2009 election, and in the ensuing unrest.

Research Limitations – Prospect theory is difficult to test outside of carefully framed laboratory experiments. Although its insights have been applied to investment behaviour, management and domestic politics, in conflict studies, robust empirical support remains underdeveloped. Moreover, since prospect theory is an individual model of decision-making, difficulties arise when dealing with nation states with multiple centres of power.

Implications – Prospect theory may be a useful analytic tool for analysing risk-acceptant decision-making in the context of dynamic economic situations.

Originality – Although this analysis complements research on rentier state theory, prospect theory integrates recent developments in behavioural economics and political psychology that may offer a new way to conceptualise the role of expectations and choice framing in decision-making which drives political stability.

Purpose: This chapter examines alternative education programs available for Myanmarese migrant youth in Thailand, what these young migrants expect of education, and how these migrant learning centers (MLCs) can help provide more opportunities for migrants.

Methods: This study draws from the data collected through two stages of qualitative research undertaken in Mae Sot, a town that borders Myawaddy, Myanmar in Thailand. Stage one consisted of ethnographic research with the local Myanmarese diaspora when I worked as a volunteer at a community-based organization. In stage two, a series of interviews were conducted with eight faculty members and twenty students enrolled in the secondary school level or vocational training program of three local MLCs.

Findings: The main finding is that even with both inclusive education policies and alternative education options in place, there is still a missing link between the educational attainment of Myanmarese migrant youth and their future prospects. While Thai public education seems to be a pathway to more future opportunities in the host country, it can be a trap when migrant youth cannot make good use of their learned knowledge and Thai language skills in the future due to their irregular status. In contrast with Thai public schools, MLCs offer more than simply education. They also provide scholarship, employment and social welfare assistance to serve the varying needs of young migrants.

Originality: The case of Myanmarese migrants presents a unique study in which the gap between students’ educational attainment and future prospects cannot necessarily be bridged even with a valid work visa scheme in place. Some Myanmarese migrants are displaced individuals who fled from civil wars and without any identification documents. The legal systems enforced by nation-states, such as Thailand, that rely on identification documents to control the flow of population still lack the capacity to adequately address the educational needs and employment opportunities of individuals with irregular status.

This chapter explains how economic analysis can contribute to the delineation of the lone wolf’s opportunities and choices in a manner that allows operationally relevant advice to be contributed to the investigative process.

Using a risk-reward analytical framework we examine the lone wolf’s attack method opportunities and choices and identify those attack methods that would be chosen by lone wolves with different levels of risk aversion. We also use prospect theory as an alternative methodology for the determination of the lone wolf’s preference orderings over the available attack methods in a context where he references his actions against those of a predecessor whom he wishes to emulate.

We find that lone wolf terrorists with different levels of risk aversion can be expected to choose different attack methods or combinations of attack methods. More risk averse lone wolf terrorists will choose attack methods such as assassination. Less risk averse lone wolf terrorists will choose attack methods such as bombing, hostage-taking and unconventional attacks. Also, we find that lone wolf terrorists who reference their actions against ‘predecessor’ lone wolf terrorists will choose differently from among the available attack methods depending on which predecessor lone wolf is being referenced.

The analysis provides two different perspectives on terrorist choice but by no means exhausts the analytical alternatives. The analysis focuses on the fatalities and injuries inflicted whereas other perspectives might include different ‘payoffs’ series, including news or media coverage.

The chapter contributes an analysis of the order in which lone wolf terrorists with particular characteristics will choose from a set of available attack methods. During the course of our discussion we point out the consistency between the ‘rise’ of the lone wolf terrorist and the diseconomies to scale that are evident within the terrorism context. This presents the opportunity for new debates.

Much of the literature on theories of decision making under risk has emphasized differences between theories. One enduring theme has been the attempt to develop a distinction between “normative” and “descriptive” theories of choice. Bernoulli (1738) introduced log utility because expected value theory was alleged to have descriptively incorrect predictions for behavior in St. Petersburg games. Much later, Kahneman and Tversky (1979) introduced prospect theory because of the alleged descriptive failure of expected utility (EU) theory (von Neumann & Morgenstern, 1947).

This paper studies the empirical application of an asset pricing model derived from the irrational individual behavior of loss aversion. Previous research using loss aversion asset pricing finds conclusive evidence that estimations match market equity premium and volatility using simulation data. We find that within its empirical application, the estimated errors are comparable to errors estimated from the capital asset pricing model. This study of the correlations between rational and irrational asset pricing model from the empirical results finds validity for both estimated values. Finally, we see the importance of cultures, economic development and financial development on asset pricing through an empirical examination of five pacific-basin countries in the estimation of asset pricing models.