One of Kahneman and Tversky's famous insights from Prospect Theory is that subjective satisfaction is determined by gains and losses relative to a reference point. This behavioural pattern is often perceived as a flaw in our approach to assessing the value of the options we face.
A robust body of literature in economic theory, which intersects with neuroscience, proposes that this aspect of subjective satisfaction is in fact likely to be the optimal solution that evolution has come up with for designing a hedonic reward system. This system guides us in making sound decisions.
This interpretation, however, is often overlooked in behavioural economics. In this Substack post, I present this idea in simple terms. I believe this serves as a perfect example of how richer economic theories and an evolutionary perspective can help us understand behavioural patterns - not as bugs, but as meaningful features.
One of Kahneman and Tversky's famous insights from Prospect Theory is that subjective satisfaction is determined by gains and losses relative to a reference point. This behavioural pattern is often perceived as a flaw in our approach to assessing the value of the options we face.
A robust body of literature in economic theory, which intersects with neuroscience, proposes that this aspect of subjective satisfaction is in fact likely to be the optimal solution that evolution has come up with for designing a hedonic reward system. This system guides us in making sound decisions.
This interpretation, however, is often overlooked in behavioural economics. In this Substack post, I present this idea in simple terms. I believe this serves as a perfect example of how richer economic theories and an evolutionary perspective can help us understand behavioural patterns - not as bugs, but as meaningful features.