Articles on the Practical Application of Prospect Theory

There are different financial theories that attempt to explain the role of finance in various markets. The concepts of these theories rely heavily on having a better understanding of the different ways in which individuals and businesses raise money. One of the articles that show practical application of financial theories is Faster is better Why taking the risk to launch a business is worth it located at http://www.startupdaily.net/taking-risk-launch-business-worth/. The article talks about the risks that startups have to go through before their business becomes a worthy venture. It gives two examples of startups, Showpo and Jason L that weighed financial risks before transforming their ideas into viable businesses.

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Practical Application of Prospect Theory in Business

Prospect theory applies to startups because they are more likely to be risk takers than established companies. According to prospect theory, when risk is involved, people prefer to avoid losses than to acquire gains (Wakker, 2010). For the startups, the main challenge they must overcome is risk (Leigh, 2016). Therefore, startups use prospect theory in determining prospects that are risk-seeking and those that are risk-aversive before venturing into a business. The startups that have a higher likelihood of succeeding show users something new that did not exist before hence more risk-seeking. Though the author mentioned the risks that startups face, she left out one crucial thing. She did not explain the main thing that made Showpo and Jason L successful. Rather than convincing users on what they have to gain, the companies focused on telling them what they stand to miss if they chose other products. Therefore, it is evident that successful startups do not go for prospects that are risk-averse but rather are risk-seeking and may not currently have a solution or are not present on certain platforms.

Finance Class and the Understanding of Prospect Theory

The class made me have a better understanding of prospect theory and the risks that companies face before venturing into new areas. As a result, I was able to understand the article more clearly on risk-seeking and risk-aversive behaviors and their link to business success.

How to Apply Prospect Theory in the Real World In the real world, companies can apply the prospect theory by dividing their products according to the features they provide and determine if they are going for risk-seeking or risk-aversive behavior. The company then needs to make the key behavior appealing to risk-seeking users and remind them of what they are missing rather than what they would be gaining so as to increase product adoption.

References

Wakker, P. P. (2010). Prospect theory: For risk and ambiguity. Cambridge University Press.

Leigh, L. (2016). Faster is Better - Why taking the risk to launch a business is worth it - Startup Daily. Startup Daily. Retrieved 5 November 2016, from http://www.startupdaily.net/taking-risk-launch-business-worth/