Thursday, March 21, 2013



Impact of prospective theory
The studies conducted in the recent past have demonstrated significant concerns about the illustration and the provisions of taxation and the change in the behavior of the general population. The changes in the behavior of the entire population has adverse effects in the implementation of government polices the taxation policies. Tax is used by the federal government as the incentive for generating revenue that’s crucial for the government budget. Behavioral factors have immense influences on the implementation of successful policies on taxation and this has prompted the likelihood of taxation failures. According to the depiction from the studies conducted, the elements of behavioral change have resulted in the invention of different taxation approaches. The aspects of behavioral change theories have stated that the population is more contented with the gains than with the losses. The usage of prospect theory is critical and it states that people have different valuations for the gains and losses of the same margin. This theory has been highlighted as the economic theory that describes the way people chose between probabilistic alternatives that involves risks. Generally, the probability outcomes of these aspects are kwon to the participants of the theory (Daniel Kahneman, 2008). Because of the differences in the perceived differences in the gains and losses, the theories have shown that there is more likeliness for the population to deviate towards the increases while they are relevant to adapt the issues of decline because this forms an incentive of losing their shares. In reality, the aspects of irrationality are clearly demonstrated where the consumers have identified as utility maximizes and always pursuing their personal gains. The pursuit of personal gains results in the alterations of the population thereby leading to the alteration in the implementation of the policies.
            Over the period, the aspects of alterations in human behavior have been of immense influence on the consideration of implementation of taxation policies. This incentive follows the depiction of the fact that the general population has critical values for the gains than for the losses of the same margin.  Generally, the attributes of irrationality are depicted through the analysis of the sentimental self interests that are depicted in the elements of taxation policies (Farnham, 1994). As mentioned above, taxation is an incentive that used by the government to control the consumption of specific substances in the economy. Some of the substances that may experience inclusion of taxes are the elements of tobacco and alcohol consumption and the motive for imposing the taxation these incentives is to enhance control of their consumption. One of the leading aspects for the notification of the attributes is the consideration of the constant changes in the element of population behavior with regards to the aspects of government taxation policies (H. Kent Baker, 2010). The attributes of self consideration are the leading propellants for the rejection of the taxation because the perceived outcomes of the taxes are viewed as having negative influence on the population.
            The outcome of the taxes introduced in the economy are responsible for the creation of opportunities in the economy and special consideration should be given to the taxes that are introduced as larger amounts at once rather than the incremental taxes. Over the period, the elements of taxation in the economy have continued to represent the aspects of risks and opportunities that should be considered in the economy. The prospect theory is one of the economic theories that are of critical benefit in the illustration of taxation and this application (Hielke Buddelmeyer, 2007). This theory is crucial in enabling the general population to ascertain the usage of taxation and some of the attributes that leads to the aspects of economic development. There are factors that are critical in explaining why people prefer the gains than the losses in the economy.
            According to the disposition effect, people dislike the aspect of incurring losses much more than they like the gains. In this regard, people often gamble for the deviation of risks that area associated with losses and this is demonstrated by the elements of investors who hold their stocks and wait for the gains to emerge before selling their proceeds. With regard to the attributes of taxation, the introductions of taxation policies in the economy have the attribute of encouraging the population to sell the items whose prices results in losses after the tax effect because therein is the fear of extra losses on the gadgets. This is considered to be ideal because it has the attribute of reducing the amount of owed capital gains. It is beneficial t consider that taxation has significant effects in the value of the stocks and the research conducted has revealed that the investors hold losing stocks for a median of 124 days while the winning stocks are held for 104 days (Jeffrey John Rachlinski, 2010). The reports collected from the holders of the losing stocks have stated that the losers hold the losing stocks on a longer period basis because they expect value appreciation. The changes in behavior are critical and have significant effects on the establishment of taxation policies because it may influence the consideration of tax advantage or tax losses. The depiction of the economic records has shown that the investors have ideal chances of incurring tax advantages through the aspects of selling the losing stocks. The reluctance of the population to incur losses indicates an aspect of saving the taxes.
            Equity equilibrium is another incentive leading to the enhancement of changes in behavior regarding the implication of taxation policies. The establishment of equity equilibrium is in collaboration with the provisions of prospect theory that highlights the effects of the gains and the losses on the changes of behavior and it is critical in ranking the gains and losses separately. Generally, the negative attitude towards the establishment of taxation losses has the attribute of altering the provisions of population behavior (Jorgenson, 1996). Ideally, the losses and gains have different consideration n the implication of the general welfare and this calls for the intervention of corrective measures to help in the eradication of the loses and the critical aspect concerns the consideration of the elements leading to the recurrence of looses. The gains have the attribute of enhancing the realization of social welfare while the losses have the consideration of reducing the realization of the welfare of the population. The general population is composed of the individuals with the aim of enhancing their welfare and this explains the attribute of rejection of losses because they aim to maximize their welfare. The central concern of the tax policy is derived from the analysis of the effects of taxation and this involves the determination of the dead weight loss and incidence (Jorgenson, 1996). The elasticity considering the changes in behavior and the alteration in taxation policies are clear objectives that results in the consideration of the taxation effects. The analysis of the data from the behavioral economies has stated that the responses to taxation are influenced by the model and the purpose of the taxes. This has also stated that irrational people in the economy have definite response of the taxes and has effects on the consideration of taxation simplicity. Therefore, the government should consider these attributes before the implementation of the tax policies because they are of immense benefits to the consideration of consumer welfare. The establishment of welfare is one of the leading incentives that enhance satisfaction. Reduction of welfare is caused by losses due to taxation hence the rejection of periodic taxes.  
            The platform for the implementation of policies is largely provided by the existing human behavioral factors. The implementation of taxation policies are based on various attributes that includes practical aspects, economic and the definition the ideal tax policy. Various people have different responses to the provisions of different taxes and this has the effect of enhancing changes in behaviors. The element so behavior changes shows that incremental tax designs are some of the policies that are discouraged through changes in behavior (Kaa, 2008). This incentive is opposed to the huge taxes levied on substances like the taxation on the usage of carbon that is levied once. The aspects of incremental taxation have continued to reject by the population because they are perceived to be the cause of reduction in the consumer welfare. Finally, the behavioral economics considers the elements of policies in terms of the usefulness on the taxes and their fiscal stimulus. The understanding of this incentive is beneficial for the enhancement and adoption of taxation policies in the economies. Examples of the taxes that have been implemented in the last 15 years includes the consideration of tax on tobacco consumption and the motive was to increase the prices of the substances by 10% and finally reduce the consumption of the commodity between 1.2% and 3.36% (Kirchler, 2007).

            The consideration and the adoption of prospect theory has proven to be extremely ideal in the establishment of future consideration of the taxes to be adopted in the economy because it helps in highlighting the elements of behavioral changes with regard to the aspects of behavioral factors. The above factors highlighted are crucial in enhancing development of the economy because it enables understanding of the possible factors that enhances changes in the population. One of the critical lessons from the elements of prospect theory is the consideration of understanding the welfare of the consumers and the contribution of that taxation employed towards the realization of overall economic performance. It is extremely beneficial for the federal government to consider the welfare effects of the taxation policies adopted because this has the effect of changing the behavior of the population. Changes in the behavior of the general population are critical as it involves the attributes of taxation notification and development (Wakker, 2011). The aspects of taxation applied in an economy have crucial concerns for the adoption of investor performance. Taxation has ideal influence on the prices of the stocks and this propels the investors to hold the stocks or sell the stocks with the view of making an additional earnings. 
            The aspects and depictions of this prospect theory have been used in decision making because they have the attribute of helping the investors in the need to ascertain the risks in investments. Over the period, the elements of investments have always been characterized by the attributes of risks and gains and these aspects of risks are adverse because they lead to the reduction in welfare of the investors. Therefore, the investors have found the usage of the system to be extremely beneficial because it helps in the making of decision regarding the profitability of their investments. In reality, this theory has continued to be beneficial because it has the aspects of assisting in the collaboration of judgment about the external and internal factors that influence performance. The attributes of basing decisions is in accordance with the analysis of the tradeoff and benefits where the benefits depicts gains while trade off depicts the losses. The acceptance of benefits is based on the consideration it increase the welfare of the population.
            Normally, future expectation has immense influence on the demand and investments of the population. The attributes of expectation are the driving factors leading to the initiation of the investment decision and this consideration has the attributes of enhancing realization of regional benefits of the taxation policies. In view of the economic impacts, the taxation policies enacted have the consideration of enhancing changes in the welfare of the population. In this regard, the population should consider the possible outcome of the prospects before the implementation of the policies. This aspect has an influencing the realization of behavioral change and it results in the implementation or rejection of policies. The policies implemented must be able to enhance the realization of welfare benefits as proposed by prospect theory (Wakker, 2011). Therefore, this analysis is extremely crucial because it enhances the understanding of key factors that leads to the alteration of population behavior. Generally, the theory highlights the factors that help in the consideration of irrationality practices. Irrational population has aspect of adopting policies that are geared towards enhancing self satisfaction and benefit maximization. The usage of this policy ideally specifies that irrational population maximizes their own welfare and have limited regards for the welfare of the society. In view of this realization, the irrational population always has the tendency to avoid the impacts of the losses because it reduces their net worth. On the other hand, the deviation towards the benefits is extremely considered because it increases the personal benefits and returns.
            The evidence collected from various economic researches has revealed that people have more preferences for the gains than the losses and they perceive gains more than they perceive losses. A confirmation of this incentive is that fact that when a person is presented with two options that projects gains and losses but with equal economic compact in the long run, majority of the individuals will choose the option with gains. The explanation for this incentive is that losses are associated with significant emotions than the gains. Taxation policies have also been associated with the element of prospect theory because of the elements of gains and losses that are associated with the taxes. The choices of the taxes to be enacted in various economies have the attribute of generation various behavioral changes in the population because they are the recipient of the population. In this regard, the population will always tend to adopt the usage of the population that have ideal incentives about the performance and existence of the economic factors. For a period, this incentive has continued to impact on the development businesses and other organizations in the economy. The aspects of taxation policy adoption are based on the values of perceived earnings and perceived losses. The tendency to avoid the losses is one of the significant attributes that enhances change in behavior (Jeffrey John Rachlinski, 2010). Finally, the underlying aspects and attributes leading tot eh adoption of this theory is the aspect of human emotions that results from the usage of policies and commodities. It is evident that the population behavioral changes are influenced by the perceived benefits from the policies. In reality, the population will deviate from polices that results in the generation of pain and loss derived from the losses and on the other hand, the population will adopt polices leading to gain and joy of the population. The establishment of this fact is extremely crucial because it helps highlights the factors that enhances the changes in the behavior of the population. The prospect theory has relevance in highlighting the illogical behavior of population. One of the situations is the consideration of the people who do not bank their money to earn interests or those who refuse to work overtime because of the additional taxations in both cases, the behaviors are justified because of the consideration of self interests that every one wishes to satisfy (Hielke Buddelmeyer, 2007). However, in the long run, the usage of prospect theory in highlighting the contributions of financial relevance and illogical behaviors is ideal. This representation is critical and it depicts the consideration of gains and losses perceived from the adopting of financial practices.

Daniel Kahneman, A. T. (2008). Choices, Values, and Frame. United States: Cambridge University Press.
Farnham, B. (1994). Avoiding Losses, Taking Risks:. Prospect Theory and International Conflict , 240.
H. Kent Baker, J. R. (2010). Behavioral Finance: Investors, Corporations, and Markets. Australia: John Wiley & Sons.
Hielke Buddelmeyer, J. C. (2007). Tax Policy Design and Behavioural Microsimulation Modelling. UK: Edward Elgar Publishing.
Jeffrey John Rachlinski, S. C. (2010). Prospect theory and civil negotiation. United States: Snippet.
Jorgenson, D. W. (1996). Investment: . Tax Policy and the Cost of Capital , 180.
Kaa, E. J. (2008). Extended prospect theory:. findings on choice behaviour from Economics and Behaviorial Sciences , 200.
Kirchler, E. (2007). The Economic Psychology of Tax Behaviour. New York: Cambridge University Press.
Wakker. (2011). Prospect Theory. New York: Cambridge University Press.