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:
“The man, or the boy, in his development is psychologically deterred from incorporating serving characteristics by an easily observable fact: there are already people around who are clearly meant to serve and they are girls and women. To perform the activities these people are doing is to risk being, and being thought of, and thinking of oneself, as a woman. This has been made a terrifying prospect and has been made to constitute a major threat to masculine identity.”
—Jean Baker Miller (20th century)
“The theory of rights enables us to rise and overthrow obstacles, but not to found a strong and lasting accord between all the elements which compose the nation.”
—Giuseppe Mazzini (1805–1872)