Prospect theory is a behavioral economic theory that describes decisions between alternatives that involve risk, where the probabilities of outcomes are known. The theory says that people make decisions based on the potential value of losses and gains rather than the final outcome, and that people evaluate these losses and gains using interesting heuristics. The model is descriptive: it tries to model real-life choices, rather than optimal decisions. The paper "Prospect Theory: An Analysis of Decision under Risk" has been called a "seminal paper in behavioral economics".
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Famous quotes containing the words prospect and/or theory:
“Through the certain prospect of death, a precious, sweet- smelling drop of levity might be mixed into every life—but now you strange pharmacist-souls have turned it into a foul-tasting drop of poison through which all life is made repulsive.”
—Friedrich Nietzsche (1844–1900)
“every subjective phenomenon is essentially connected with a single point of view, and it seems inevitable that an objective, physical theory will abandon that point of view.”
—Thomas Nagel (b. 1938)