Photo by Tiffany Washko
Imagine you just won the lottery and was rewarded $1 million. The tax department soon caught up with you and billed you 50% of your winning - which is a hefty $500,000. How would you feel?
Compare that feeling to this scenario: You just won the lottery and was rewarded $500,000… tax-free.
In which scenario do you think you would feel happier?
That’s right. You’d be happier in scenario B than in scenario A and that’s exactly what prospect theory predicts.