This simulation models how psychological biases affect economic decision-making, demonstrating Kahneman and Tversky's Prospect Theory in action.
About This Simulation
Agents make investment decisions influenced by loss aversion, overconfidence, and herd behavior, revealing how cognitive biases shape markets.
Key Concepts
- Loss Aversion: Losses feel roughly twice as painful as equivalent gains feel good. The asymmetric value function shows this clearly.
- Reference Points: People evaluate outcomes relative to a reference point, not in absolute terms. Gains and losses are relative.
- Herd Behavior: Agents follow the crowd, amplifying market trends and potentially creating bubbles or crashes.
- Overconfidence: Some agents overestimate their ability to predict market returns, taking excessive risks.
Why It Matters
Behavioral economics explains market anomalies that classical economics cannot: bubbles, panics, and persistent biases in financial decision-making.
How to Explore
- Increase Loss Aversion to see agents become more conservative and cluster toward safe choices
- Increase Herd Behavior to observe boom-bust cycles as agents follow each other
- Watch the wealth distribution histogram to see inequality emerge from different strategies
- The decision chart shows how risk-taking fluctuates over time
Category: Economics & Markets — Exploring behavioral biases and decision-making under uncertainty