Kahneman-Tversky Utility Model

The Kahneman-Tversky Utility Model, also known as Prospect Theory, describes how people make choices involving risk and uncertainty. Unlike traditional models that assume people weigh outcomes linearly, this theory shows they perceive gains and losses differently: losses typically hurt more than equivalent gains please, and people are often more risk-averse with gains but risk-seeking with losses. Additionally, individuals assign subjective value to outcomes, influenced by their reference point, and tend to overweigh small probabilities or underweigh large ones. This model better explains real-world decision-making, highlighting biases and heuristics that influence choices under uncertainty.