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:
“Measure your health by your sympathy with morning and spring. If there is no response in you to the awakening of nature—if the prospect of an early morning walk does not banish sleep, if the warble of the first bluebird does not thrill you—know that the morning and spring of your life are past. Thus may you feel your pulse.”
—Henry David Thoreau (1817–1862)
“We have our little theory on all human and divine things. Poetry, the workings of genius itself, which, in all times, with one or another meaning, has been called Inspiration, and held to be mysterious and inscrutable, is no longer without its scientific exposition. The building of the lofty rhyme is like any other masonry or bricklaying: we have theories of its rise, height, decline and fall—which latter, it would seem, is now near, among all people.”
—Thomas Carlyle (1795–1881)