# we understand value as much by our starting point as by the actual objective value at the time.

#### saide

##### Senior Member
Hi everybody

I found them in: Daniel Kahneman’s Thinking, Fast and Slow (2011)

Imagine these two scenarios for example: In the first scenario, you’re given \$1,000 and then must choose between receiving a definite \$500 or taking a 50 percent chance to win another \$1,000. In the second scenario, you’re given \$2,000 and must then choose between a sure loss of \$500 or taking a 50 percent chance on losing \$1,000.
....
The reference point in the first scenario is \$1,000 and \$2,000 in the second,.... Even though our reasoning here is clearly irrational, we understand value as much by our starting point as by the actual objective value at the time.

Thank you

• #### bennymix

##### Senior Member
It is not possible to explain a whole page based on five sentences, not consecutive. There's a gap between sentences (3 and 4) and the 4th sentence is perhaps half missing.

#### saide

##### Senior Member
I omitted some sentences to avoid long massaging. here is the whole story:

Imagine these two scenarios for example: In the first scenario, you’re given \$1,000 and then must choose between receiving a definite \$500 or taking a 50 percent chance to win another \$1,000. In the second scenario, you’re given \$2,000 and must then choose between a sure loss of \$500 or taking a 50 percent chance on losing \$1,000. If we made purely rational choices, then we would make the same choice in both cases. But this isn’t the case. In the first instance, most people choose to take the sure bet, while in the second case, most people take a gamble. Prospect theory helps to explain why this is the case. It highlights at least two reasons why we don’t always act rationally. Both of them feature our loss aversion— the fact that we fear losses more than we value gains. The first reason is that we value things based on reference points. Starting with \$1,000 or \$2,000 in the two scenarios changes whether we’re willing to gamble, because the starting point affects how we value our position. The reference point in the first scenario is \$1,000 and \$2,000 in the second, which means ending up at \$1,500 feels like a win in the first, but a distasteful loss in the second. Even though our reasoning here is clearly irrational, we understand value as much by our starting point as by the actual objective value at the time. Second, we’re influenced by the diminishing sensitivity principle: the value we perceive may be different from its actual worth. For instance, going from \$1,000 to \$900 doesn’t feel as bad as going from \$200 to \$100, despite the monetary value of both losses being equal. Similarly in our example, the perceived value lost when going from \$1,500 to \$1,000 is greater than when going from \$2,000 to \$1,500.

Thank you

#### MattiasNYC

##### Senior Member
His point is that in the two scenarios you can come to exactly the same end results. He basically calls those end results "actual objective value".

If you are presented with only one of the two scenarios you make one choice. If you are presented with the other scenario you don't use the same thinking even though the potential outcomes are the same. The key is when he writes "ending up at \$1,500 feels like a win in the first, but a distasteful loss in the second. "

So even though it's the same amount of money, the same "actual objective value" (measured in dollars), our emotional value we place on that same end result is different in the different scenarios. It's different because we start with different figures.

He makes the same case later when he writes "the perceived value lost when going from \$1,500 to \$1,000 is greater than when going from \$2,000 to \$1,500." Our perception (or what I called emotional value) is different from the objective value. You're losing \$500 in both cases, but as a fraction it's bigger in the first case (a 33% loss) compared to the last case (a 25% loss)...

#### saide

##### Senior Member
that's great. thank you very much.

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