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".
Read more about Prospect Theory: Model, Applications, Limits and Extensions
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)
“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)