Tversky and Kahneman's Prospect Theory

Tversky and Kahneman's Prospect Theory explains how people make decisions under uncertainty, particularly regarding gains and losses. It suggests that individuals tend to value potential losses more heavily than equivalent gains, a concept known as loss aversion. This means that losing $100 feels more painful than the joy of gaining $100 feels pleasant. The theory also highlights that people evaluate outcomes based on perceived changes from a reference point, rather than final outcomes, leading to behaviors that deviate from traditional economic theories. Overall, it provides insight into the irrational aspects of human decision-making in risky situations.