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:
“Nature and human life are as various as our several constitutions. Who shall say what prospect life offers to another?”
—Henry David Thoreau (1817–1862)
“Psychotherapy—The theory that the patient will probably get well anyway, and is certainly a damned ijjit.”
—H.L. (Henry Lewis)