The fourfold pattern of risk attitudes in psychology, as outlined in Prospect Theory by Daniel Kahneman and Amos Tversky, is a model that describes how people choose between probabilistic alternatives that involve risk, where the probabilities of outcomes are known. This model is part of behavioral economics and describes how people’s choices can be irrationally influenced by their reference points, leading to inconsistent risk behavior. The fourfold pattern is categorized into four scenarios based on the combination of outcomes (gains vs. losses) and probabilities (high vs. low):
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Gains with High Probability: Individuals tend to be risk-averse. For example, given a choice between a certain gain of 100, most people will choose the sure gain of $50.
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Gains with Low Probability: Individuals become risk-seeking. Faced with a choice between a certain gain of 100, many people will prefer to take the gamble for $100, despite the lower expected value.
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Losses with High Probability: Individuals tend to become risk-seeking. When given the option between a certain loss of 100, people often prefer to risk losing $100, hoping to avoid the loss entirely.
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Losses with Low Probability: Individuals are risk-averse. This is where the preference shifts towards a sure small loss over a small chance of a larger loss, which is why people buy insurance.
The fourfold pattern demonstrates that people do not always act ‘rationally’ in economic terms; their aversion to loss and their approach to risk can change dramatically depending on how choices are presented and how likely they are to result in gains or losses. This pattern has profound implications for understanding human behavior in various fields, such as finance, economics, and public policy.