So in the last video, what we have covered, or at least started to look at,

is what we call the prospect theory in understanding the bounded

rationality approach in the continuum of consumer decision making process.

As we have mentioned, prospect theory has three main pillars.

First one is a value function, the second one is called the risk function,

and the third one is called the reference point.

So as you can see in the graph, the value function is in the positive and

the negative quadrant, are concave.

And there is at the center, which is the axis, is what is the reference point

relative to which consumers are going to judge their product characteristics.

Also, remember that this reference point is important to evaluate not only

the features of the product, but also how the product has prices or

any other characteristics which might be important to the consumers.

The second aspect of prospect theory is what we are going to call framing.

This is where losses loom larger than gains.

So think about the scenario where you're seeing that you are going to pay $50 more

on a product that is a $100 product being sold for $150.

At the same time, you see that the same $100 product,

let's say it's being sold at $50.

So basically one product, the same product, once increased to $150,

are other times decreased to $50.

So which one do you think you'd prefer more?

I'm pretty sure, given the theory behind prospect theory,

you will see that you definitely like the fact that the price of the product

is actually going down to $50 even though the increase to $150, is the same amount.

The third aspect of prospect theory is the risk profile.

This is where consumers actually reduce the sensitivity

to changes in prices and, of course,

this is very critical when you are making a purchase in a particular category.

Let's think about another example.

Say a product, it was initially priced at $100 and now the price of the product has