Friday, 16 May 2008

Avoiding risk


Cognition and Language Lab: Avoiding risk: "On the X axis is objective gains and losses (for sake of simplicity, assume what we are gaining and losing is money). On the Y axis is subjective utility -- how much you like the gain or dislike the loss.

The striking thing is that the line is not straight."

the difference between winning $5 and winning $15 is greater than the difference between winning $1005 and $1015. The same goes for losses -- losing $5 is annoying, but losing an extra $5 on top of a loss of $1000 is just a drop in the bucket.
"This graph also shows that losses loom larger than gains, but I leave it to the reader to work this out for themselves."