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:
“Yet we must try the harder, the less the prospect of success.”
—Henry David Thoreau (1817–1862)
“The great tragedy of science—the slaying of a beautiful theory by an ugly fact.”
—Thomas Henry Huxley (1825–1895)