Book contents
- Making Decisions: Analytics, Cognition, and Application
- Making Decisions: Analytics, Cognition, and Application
- Copyright page
- Dedication
- Contents
- Figures
- Tables
- Preface
- Acknowledgments
- Copyright Acknowledgements
- Part IAnalytics: Probability, Evaluation, Decision Trees, and Strategies for Decision Making
- Introduction to Part II: Cognitive Processes of Decision Making
- 5Heuristics: Assumptions and Quick Rules of Thumb We All Use, But Maybe Shouldn’t
- 6Prospect Theory: Psychological Aspects beyond Expected Value
- 7Two Systems: A Descriptive Model That Explains How People Make Decisions
- 8Decisions Are Made Based on Our Memories, But How Reliable Are Our Memories?
- 9Psychology + Economics = Behavioral Economics = Ways to (Gently) Influence Decisions
- Part IIIApplications, Examples, and Selected Topics
- References
- Index
- References
6 - Prospect Theory: Psychological Aspects beyond Expected Value
from Introduction to Part II: Cognitive Processes of Decision Making
Published online by Cambridge University Press: 23 October 2025
Book contents
- Making Decisions: Analytics, Cognition, and Application
- Making Decisions: Analytics, Cognition, and Application
- Copyright page
- Dedication
- Contents
- Figures
- Tables
- Preface
- Acknowledgments
- Copyright Acknowledgements
- Part IAnalytics: Probability, Evaluation, Decision Trees, and Strategies for Decision Making
- Introduction to Part II: Cognitive Processes of Decision Making
- 5Heuristics: Assumptions and Quick Rules of Thumb We All Use, But Maybe Shouldn’t
- 6Prospect Theory: Psychological Aspects beyond Expected Value
- 7Two Systems: A Descriptive Model That Explains How People Make Decisions
- 8Decisions Are Made Based on Our Memories, But How Reliable Are Our Memories?
- 9Psychology + Economics = Behavioral Economics = Ways to (Gently) Influence Decisions
- Part IIIApplications, Examples, and Selected Topics
- References
- Index
- References
Summary
Prospect theory is a descriptive model that was developed by behavioral researchers Daniel Kahneman and Amos Tversky. According to prospect theory, people will subjectively value a loss of a fixed amount as more than a gain of the same amount. Gains and losses are not perceived in absolute value, but instead are determined based on a perceived reference or zero point.
According to prospect theory, when offered a gain, people will prefer a sure gain to a risky gain with the same expected value, but when facing a loss, they will prefer a risky loss to a sure loss of the same expected value. People will overweight low probabilities and therefore overestimate the utility expected (positive or negative) of low-probability events.
Information
- Type
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- Information
- Making Decisions: Analytics, Cognition, and Application , pp. 74 - 90Publisher: Cambridge University PressPrint publication year: 2025
References
Recommended Reading
Ellsberg, D. (1961). Risk, ambiguity, and the savage axioms. The Quarterly Journal of Economics, 75(4), 643. https://doi.org/10.2307/1884324.CrossRefGoogle Scholar
Kahneman, D., & Tversky, A. (2000). Prospect theory: An analysis of decision under risk. Choices, Values, and Frames, 17–43. https://doi.org/10.1017/cbo9780511803475.003.CrossRefGoogle Scholar
von Neumann, J., & Morgenstern, O. (1955). Theory of games and economic behavior. Princeton University Press.Google Scholar
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