C.P. Theory

C.P. Theory, or the Cumulative Prospect Theory, is a psychological model that explains how people make decisions under uncertainty, especially regarding risk and reward. Unlike traditional economic theories that assume rational choices, C.P. Theory recognizes that individuals evaluate potential gains and losses differently. People tend to feel losses more acutely than equivalent gains, leading to risk-averse behavior when faced with potential gains and risk-seeking behavior when trying to avoid losses. This theory helps explain various economic behaviors, including why people buy insurance or gamble, as it reflects the complex ways we assess risk and outcomes.