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:
“I do not mean to exclude altogether the idea of patriotism. I know it exists, and I know it has done much in the present contest. But I will venture to assert, that a great and lasting war can never be supported on this principle alone. It must be aided by a prospect of interest, or some reward.”
—George Washington (1732–1799)
“Every theory is a self-fulfilling prophecy that orders experience into the framework it provides.”
—Ruth Hubbard (b. 1924)