Prospect Theory

Created: 2022-12-27
Status: #soil
Last Edited: 2022-12-27
Topic: economics

What is Prospect Theory?

Prospect theory is a behavioral economic theory which posits that people's decisions are largely influenced by the potential outcomes and risks associated with the decision.

The theory was first proposed in 1979 by Daniel Kahneman and Amos Tversky. The core idea of prospect theory is that people's choices are based on perceived gains and losses rather than on expected utility. When making a decision, people weigh the potential gains or losses associated with each possible outcome, often taking into consideration the probability of success or failure.

Prospect theory has been used to explain many different types of economic behavior, including investment decisions, risk taking, and gambling.