I wanted to try to fit into one image the various levels of my understanding of the word of behavioural economics and here it is. The idea is it is a bastardisation of the normal distribution, which is associated in my head with the rationalist, probabilist, utility maximising approach to so called economic thinking.
1. The distribution x-axis scale is ratio based and not linear or difference bases. From psychophysics, we learn that humans are better at giving relative price valuations than absolute ones
2. The meaning of gain versus loss feels totally different for us. The same economic loss or benefit expressed as a loss or a gain is valued differently by us - we have to lose.
3. The mean of this comedic curve waggles around a lot, with a listening ear, being swayed by priming effects, driving anchoring effect.
4. Certainty effect - as you move from 99% to 100% there's a discontinuity in human thinking. A certainty premium.
5. Then at the ends, before the certainty effect discontinuity, there are 2 threads each at either extreme point. This represents our perceived attitude to risk based on the two dimensions of - loss or gain; and likely, unlikely. On the loss side, we like to 'go for broke' facing a likely loss whereas become risk adverse facing an unlikely loss. Whereas on the gain side, we are risk adverse facing a likely gain (a bird in the hand is worth two in the bush) and facing an unlikely gain, we become 'no guts no glory' risk welcoming.
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