Class Year

2016

Date

4-14-2016

Document Type

Thesis

Distinguished Thesis

Yes

Degree Name

Bachelor of Arts (BA)

Department or Program

Economics

First Advisor

Amanda J. Felkey

Second Advisor

Robert J. Lemke

Third Advisor

Matthew R. Kelley

Abstract

Prospect theory describes how people evaluate decisions under risk. I modify prospect theory to account for how ex-post surprise affects an individual’s evaluation of subsequent prospects. Based on this adaptation of prospect theory, I hypothesize that unexpected outcomes yield greater utility or disutility compared to expected outcomes due to expectations-based reference points. The effect surprise has on utility should manifest itself in terms of risk preferences and ex-post reference point shift. Two experiments are conducted to measure the effect of surprise on utility, risk preferences, and reference point shift. Data is collected from undergraduate students at Lake Forest College. The results show evidence for expectations-based reference points, utility of surprise outcomes is greater than expected outcomes, and reference point shift is faster in surprise outcomes. Refinements to the experimental protocols are explored to inform future research. Policy implications concerning financial markets, marketing, and general decision-making are discussed.


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