Prospect Theory

Prospect Theory is an attempt by Amos Tversky and Daniel Kahneman to construct a decision theory that describes the actual behavior of humans, rather than idealized rational decision-making.

An agent, in prospect theory:

• is loss-averse, and so weighs losses (relative to some reference point) more strongly than gains
• is risk-averse with respect to gains, but risk-seeking with respect to losses
• uses probability weighting: small probabilities count more and larger probabilities count less than they would under expected utility.

Blog posts

• Shane Legg on prospect theory and computational finance
• Prospect Theory: A Framework for Understanding Cognitive Biases

External links

• Prospect theory at Psychology Wiki

See also

• Heuristics and biases
• Loss aversion
• Decision theory
• Expected utility