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:
“Nothing that can be can come between me and the full prospect of my hopes.”
—William Shakespeare (1564–1616)
“Don’t confuse hypothesis and theory. The former is a possible explanation; the latter, the correct one. The establishment of theory is the very purpose of science.”
—Martin H. Fischer (1879–1962)