Prospect Theory as Efficient Perceptual Distortion

The paper proposes a theory of efficient perceptual distortions, in which the statistical relation between subjective perceptions and the objective state minimizes the error of the state estimate, subject to a constraint on information processing capacity. The theory is shown to account for observed...

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Bibliographic Details
Published inThe American economic review Vol. 102; no. 3; pp. 41 - 46
Main Author Woodford, Michael
Format Journal Article
LanguageEnglish
Published Nashville American Economic Association 01.05.2012
American Economic Assoc
Subjects
ATTENTION AND CHOICE
Conditional probabilities
Data compression
Decision making
Distortion
Economic choice
Economic prospects
Economic theory
Economic value
Gaussian distributions
Hypotheses
Information processing
Lagrange multiplier
Lotteries
Luminance
Neurosciences
Normal distribution
Perception
Perceptual distortion
Probability
Prospect theory
Rational choice theory
Risk aversion
Visual perception
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ISSN0002-8282
1944-7981
DOI10.1257/aer.102.3.41

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Summary:The paper proposes a theory of efficient perceptual distortions, in which the statistical relation between subjective perceptions and the objective state minimizes the error of the state estimate, subject to a constraint on information processing capacity. The theory is shown to account for observed limits to the accuracy of visual perception, and then postulated to apply to perception of options in economic choice situations as well. When applied to choice between lotteries, it implies reference-dependent valuations, and predicts both risk-aversion with respect to gains and risk-seeking with respect to losses, as in the prospect theory of Kahneman and Tversky (1979).
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ISSN:0002-8282
1944-7981
DOI:10.1257/aer.102.3.41