Kahneman-Tversky Prospect Theory

Kahneman-Tversky Prospect Theory explains how people make decisions involving risk and uncertainty, often deviating from traditional economic logic. It suggests that individuals evaluate potential gains and losses relative to a personal reference point, rather than on absolute outcomes, and tend to be more sensitive to losses than to equivalent gains. This leads to behaviors like risk aversion with gains and risk-seeking with losses. The theory highlights that our choices are shaped by perceived value and emotional responses, rather than purely rational calculations, helping to better predict real-world decision-making in situations involving uncertainty.