A Swiss mathematician remembered most for his pioneering work in probability and statistics. Bernoulli developed utility theory in 1738, which demonstrated that the utility of money and the state of one’s wealth is more important than its intrinsic value (i.e., a gift of 10 ducats has the same utility to someone with 100 ducats as 20 ducats has to someone with 200 ducats). Kahneman and Tversky adapted utility theory and addressed some of its flaws in creating prospect theory.
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Daniel Bernoulli Character Timeline in Thinking, Fast and Slow
The timeline below shows where the character Daniel Bernoulli appears in Thinking, Fast and Slow. The colored dots and icons indicate which themes are associated with that appearance.
Part 4, Chapter 25
In 1738, Swiss scientist Daniel Bernoulli investigated the relationship between the psychological value of money (its utility) and the actual amount...
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Bernoulli disproved the assumptions of his day, which is that gambles are assessed by their expected...
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Bernoulli created a table (shown on page 273) that calculated the utility of different amounts of...
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Bernoulli’s essay explains why poor people buy insurance and why rich people sell it: the loss...
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But Bernoulli’s theory has a major flaw. It assumes that the utility of one’s wealth is what...
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Another flaw in Bernoulli’s theory is found in this example: Anthony’s current wealth is 1 million. Betty’s wealth is...
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Part 4, Chapter 26
Kahneman discovered the flaws in Bernoulli’s theory because he noticed that gambles were often spoken of in terms of a few...
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...this drives people to take the risk. People become risk-seeking when all options are bad. Bernoulli’s theory did not have a way to accommodate this difference.
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...$500 for sure. In both problems, the final states of wealth are identical. According to Bernoulli’s theory, people should have the same preferences in both. In reality, people are risk-averse in...
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Kahneman points out another flaw in Bernoulli’s theory, proved by Matthew Rabin in 2000. He notes that most Humans reject this gamble:...
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Part 4, Chapter 29
In Bernoulli’s theory, gambles were assessed by their expected value—the average of each outcome, weighted by the...
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