Prospect Theory

Your constantly-updated definition of Prospect Theory and collection of topical content and literature


What is Prospect Theory?

In economic theory it was once considered that all economic decisions were made on a rational basis based on choice between two (or sometimes more) economic values. However, behavioral economics has discovered that in fact that people generally do not behave rationally and that they may make poor economic decisions on value because of this. Prospect theory describes the way people choose between different value outcomes when there is a measure of risk involved in those outcomes.