Prospect theory: An analysis of decision under risk

63Citations
Citations of this article
9.4kReaders
Mendeley users who have this article in their library.
Get full text

Abstract

This paper presents a critique of expected utility theory as a descriptive model of decision making under risk and develops an alternative model, called prospect theory. Choices among risky prospects exhibit several pervasive effects that are inconsistent with the basic tenets of utility theory. In particular, people underweight outcomes that are merely probable in comparison with outcomes that are obtained with certainty. This tendency, called the certainty effect, contributes to risk aversion in choices involving sure gains and to risk seeking in choices involving sure losses. In addition, people generally discard components that are shared by all prospects under consideration. This tendency, called the isolation effect, leads to inconsistent preferences when the same choice is presented in different forms. An alternative theory of choice is developed, in which value is assigned to gains and losses rather than to final assets and in which probabilities are replaced by decision weights. The value function is normally concave for gains, commonly convex for losses, and is generally steeper for losses than for gains. Decision weights are generally lower than the corresponding probabilities, except in the range of low probabilities. Overweighting of low probabilities may contribute to the attractiveness of both insurance and gambling.

Cite

CITATION STYLE

APA

Kahneman, D., & Tversky, A. (2019). Prospect theory: An analysis of decision under risk. In Choices, Values, and Frames (pp. 17–43). Cambridge University Press. https://doi.org/10.1017/CBO9780511803475.003

Register to see more suggestions

Mendeley helps you to discover research relevant for your work.

Already have an account?

Save time finding and organizing research with Mendeley

Sign up for free