The Prospect Theory

Prospect Theory is a behavioral economics concept that explains how people make decisions under risk. It suggests that individuals evaluate potential gains and losses differently, often being more sensitive to losses than to equivalent gains. For example, losing $100 feels more painful than the pleasure of gaining $100. This leads to risk-averse behavior when considering gains and risk-seeking behavior when faced with losses. Essentially, people prefer to avoid losses rather than pursuing equal gains, which can lead to inconsistent and sometimes irrational decision-making. It highlights the psychological factors influencing economic choices.