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:
“The higher the mountain on which you stand, the less change in the prospect from year to year, from age to age. Above a certain height there is no change.”
—Henry David Thoreau (1817–1862)
“The things that will destroy America are prosperity-at-any- price, peace-at-any-price, safety-first instead of duty-first, the love of soft living, and the get-rich-quick theory of life.”
—Theodore Roosevelt (1858–1919)