Prospect Theory is an attempt by Amos Tversky and Daniel Kahneman to construct a decision theory that describes the actual behavior of humans, rather than idealized rational decision-making.
An agent, in prospect theory:
- is loss-averse, and so weighs losses (relative to some reference point) more strongly than gains
- is risk-averse with respect to gains, but risk-seeking with respect to losses
- uses probability weighting: small probabilities count more and larger probabilities count less than they would under expected utility.