When making intuitive decisions, individuals are rarely risk-neutral or consistently risk-averse
How do individuals make decisions in situations involving risk? How do we instinctually trade off the potential for a gain with the potential for loss?
Most individuals fear losses more than they like gain — we are loss averse — and the choice of reference point shifts our perception of gains and losses.
And individuals find small chances of large payoffs quite attractive, as if magnifying the probabilities of larger outcomes.
[This article has been reproduced with permission from University Of Virginia's Darden School Of Business. This piece originally appeared on Darden Ideas to Action.]