Prospect Theory: Does the Original or Revised Leddo, Jayanti and Duan Value Function Better Predict the Decision-Making Behavior of 5th Graders?

Prospect Theory (Kahneman and Tversky, 1979) is a highly influential theory that predicts decision making when people are confronted with choices involving gains or losses with different degrees of uncertainty. Prospect Theory argues that people are generally risk averse when it comes to seeking gains and risk seeking when it comes to seeking losses. However, Prospect Theory was originally created using hypothetical decisions. As a result, Prospect Theory has had mixed results when subject to testing in real-world decision-making contexts. One reason for this is that people tend to have goals that they are trying to achieve or outcomes they are trying to avoid when making their decisions, something Prospect Theory does not take into account. Our previous research investigated the effects of such positive goals (called “aspiration levels”) and avoidance outcomes (called “avoidance levels”) on decision making (Leddo et. al, 2019). Those results found that people were risk seeking, rather than risk averse, for gains below the aspiration level and risk averse for gains above the aspiration level, while being risk averse, rather than risk seeking, for losses above the avoidance level and risk seeking for losses below the avoidance level. The present study investigated whether this revised Prospect Theory could predict the decision-making behaviors of children. 42 5th grade students were given a single scenario of a prospect involving gains or losses. Each scenario offered two options: a risky option and a certain option.