Prospect Theory is an attempt by Amos Tversky and Daniel Kahneman to construct a that describes the actual behavior of humans, rather than idealized decision-making.
An agent, in prospect theory:
- is , 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 .
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