Tags All Entries

Prospect Theory

A theory developed by Daniel Kahneman and Amos Tversky regarding how people choose between options that involve risk. The theory highlights how individuals assess loss and gain in an asymetric manner.

Faced with a risky choice leading to gains, people are risk-averse, preferring certain gains over riskier gains with a higher utility. Faced with a risky choice leading to losses, people are risk-seeking, preferring solutions that lead to lower expected utility as long as it avoids losses.