I'm reading the book Priceless by William Poundstone which discusses the work of Kahneman and Tversky (among others) in great detail as it relates to the psychology of pricing (excellent read, btw).<p>This is O.T from what the article is saying but mildly O.T (meaning on-topic) and I'd love to hear HN's opinion on this.<p>One of the problems presented in Priceless is:<p>Would you rather $3,000 as a sure thing, or an 80% chance of $4,000 and a 20% chance of nothing<p>versus:<p>Would you rather a $3,000 loss as a sure thing, or an 80% chance of losing $4,000 and a 20% chance of losing nothing.<p>The erroneous path that most people take, in the eyes of these researchers, is that they set their base reference point at the sure thing, ie. they say "well the $3,000 is a sure thing so I can assume I have it".<p>If you do that, then your answers are different:<p>In the first instance you keep the $3,000 (because it becomes an 80% chance of winning $1,000 versus a 20% chance of losing $3,000).<p>In the second instance you go to court (because it's an 80% chance of losing $1,000 versus a 20% chance of winning $3,000).<p>However if you don't "rebase" your reference point, then you would make the same decision in both cases - that is you would take the 80% of $4,000 bet because it's "worth" $3,200.<p>As much as I realise what they're saying and they say it's statistically incorrect to do this, it really seems to me the most sensible way to make the decisions (which is, I guess, exactly what they're saying right? I'm human, ergo fallible to this kind of illusion).<p>The thing that kills me is this: if this is a one time thing, I'd rather be sure of the $3,000. If I'm buying and selling these bets all day, then sure I should take the $4,000 at 80% because even if I lose this round, the next time I take the bet will make up for it (ie. law of large numbers).<p>But what this problem doesn't address is how <i>often</i> I get this opportunity? Depending on my circumstances, $3,000 could be a life changing opportunity, ie. if I "win" $3,000 or $4,000, my circumstances are essentially the same so I should always go for the sure thing. If I lose $3,000 or $4,000 I'm equally screwed, so I should take the risk and try and win in court.<p>What am I missing?