Cumulative Prospect Theory

Lately, I've been thinking a lot about about behavioural economics, and the works of Daniel Kahneman and Amos Tversky.

This may be a secondary effect of going back to school, after three years dedicated to working in a dead-end job, with no real interest in what I do, just because the money's good and it has been allowing me to live a good life. On the other hand, it may just be because things are not what they used to: there's a "February".
There has never been a "February" quite like this one. There were "Junes", "Augusts" and they were good, but this is... something else! Its on the back of my head, all live long day, on every smoke and every coffee cup.

But back to Kanheman and Tversky...

I've been looking closer into the "Cumulative Prospect Theory": according to the authors, a "Framing Effect" occurs, every time people think about the possible outcomes of a certain choice. I.e. when people are faced with a choice, the format in which the outcome alternatives are presented, influences their their decision. Normally what happens is that, on evaluating outcomes, people often use the status quo as a reference point, rather than the final status. In addition, different attitudes towards the risk of gains (outcomes above the reference point) and losses (outcomes below the reference point) come into play, during the decision-making stages, though people are generally more inclined to worry about potential losses, than potential gains (loss aversion). People also tend to overweight "extreme", but unlikely events and, on the other hand, underweight "average" events.
(Full paper here)

This makes sense... Lets go through it:

• Status quo: come end of term and I go to the Isles for a rugby match and visit friends. I've been wanting to go and watch a Six Nations match (Welsh one, at that) and I know that I'll like it. Maybe I'll watch it in Ireland and I'll get to visit Skellig Michael. This is all nice and fun, but still this is nothing of extraordinary, no "February", at least. As I see it, it will be an isolated event, with no repercussion on my future and it's bound to happen, sooner or later, as Wales will play in Ireland again, in 2014.
• "February" is all I've been dreaming of, for the last months. It's my "Garden of earthly delights", something I KNOW it will make me happy beyond belief. It is also something that, in my gut, I feel that it will lead me through a different path in life. Nothing will be quite the same before "February"... The mere sight of it has been enough... It is an "extreme", in terms of gains and it is unlikely to happen again, as some things in life only happen once!

As it stands, the gains derived from my status quo choice are far lower than the ones from "February" and the latter is an unlikely event. As such, according the Kahneman and Tversky, I will always choose "February", no matter how much I stand to loose, or how much I stand to get hurt, in case it shouldn't happen.

 Skelling Michael: I wanna sit here for a while