Prospect Theory Of Decision Making

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One of the leading theories of human decision making is Prospect Theory (Kahneman & Tversky, 1979). It is a more psychologically accurate approach to describing human decision making, compared to the expected utility theory. In particular, an important element of prospect theory, reference-dependent preferences, is based on the main idea that an individual’s assessment of an outcome, is not only determined by the outcome itself but how the outcome compares to a reference point. In doing so, it typically assumes that outcomes relative to the reference point; are evaluated by an S-shaped value function – capturing two key components: loss aversion (suggesting losses hurt more than gains feel good) and diminishing sensitivity (by being convex …show more content…

Professional sports provide an attractive setting to test for (expectation-based) reference dependence and loss aversion due to the availability of vast pre-play betting odds that can serve as proxies for expectation-based reference points. Specifically, a paper by Bartling et. al. (2015) takes advantage of such a setting by using data from professional football leagues, where they analyze behavior in terms of card assignments, and substitution decisions. I aim to extend on their research, adding additional measures of behavior to analyze the presence and effects of expectation-based reference-dependence on the behavior of players’ and coaches’ in the English Premier …show more content…

al. (2015) and Grund & Gürtler (2005). Using a unique set of panel field data will allow me to observe a specific quantitative measure of ex-ante expectations, a current state relative to said expectations, and several objective measures of behavior over periods of time. This dataset includes observations from every match in the 2015-2016 season of the English Premier League, from the perspective of both teams. It includes various measures of behavior for both players and coaches, in terms of both risk (such as strategic adjustments, fouls, and card assignments) and effort (such as the number of shots attempted, errors made, and the accuracy of tackles attempted). In addition, a measure of expectations for each match is constructed, using a wide set of professional bookmakers’ pre-play betting odds on match

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