Cumulative Prospect Theory

Cumulative Prospect Theory (CPT) is a model that explains how people make decisions involving risk and uncertainty. It highlights that individuals don’t evaluate potential gains and losses objectively; instead, they tend to overweight small probabilities and underweight large ones. People also place more emotional significance on losses than on equivalent gains (loss aversion). CPT adjusts for these behaviors by ranking outcomes and assigning subjective weights, helping predict choices more accurately than traditional economic models. It reflects real-world decision patterns, showing that feelings about gains and losses influence choices more than the actual odds or outcomes.