The same observation may have a different effect, depending on one’s
view or starting point. The
core of the relative evaluation theory states that judgments based on
perception are influenced by previous experiences that people have encountered.
and evaluation of gains and losses is dependent on the reference point:
SENSITIVITY: people are more pleased
with the first gain than with the second one, but
more with the second than with the third one. The same effect is observed
in the loss zone – people
are really annoyed about the first loss, but less so with the second one.
They can become risk-
averse from a particular point onwards and thus incur significant losses.
DISPOSITION EFFECTS: this is the
inclination to realize profits too soon and to hang on to losses for too
long. If an investor has achieved a high increase in value following a
rise in the price, compared with
the cost price, he will cash in on his gain, because a further rise in
the price offers a small increase
in value. If an investor faces a drop in the value of his shares, a further
drop in price does not matter
to her a much as the previous price fall, and she will tend to hang on
to the loss even when there is
a small chance that the price will recover.
SUNK COST EFFECT:
this is the effect that already incurred costs may have on the willingness
invest further. It causes people to hang on for a disproportionately long
time to unsuccessful projects, even if their failure can be predicted
early on. The effect is intensified if the venture is in the public eye.The
more people know about an unsuccessful project, the harder it is to abandon
enterprise at an early stage.
effect of time on judgment
of time become increasingly less important as they are further removed
from the present.
People would rather have something today than later – as a result
the utility of a product is reduced
if it becomes available later. Additionally, the same period of time is
not perceived as being of the
same length. The sense of time depends on the distance from the present