Prospect theory psychology

1. What is the prospect theory in psychology?
2. What are the three basic ideas of prospect theory?
3. What is Kahneman and Tversky's prospect theory?
4. What is the most important point of prospect theory?

What is the prospect theory in psychology?

Prospect theory states that decision-making depends on choosing among options that may themselves rest on biased judgments. Thus, it built on earlier work conducted by Kahneman and Tversky on judgmental heuristics and the biases that can accompany assessments of frequency and probability.

What are the three basic ideas of prospect theory?

Prospect theory explains the biases that people use when they make such decisions: Certainty. Isolation effect. Loss aversion.

What is Kahneman and Tversky's prospect theory?

The prospect theory holds that individuals are more influenced by the possibility of a loss than the prospect of an equivalent gain (Tversky & Kahneman, 1981). Moreover, while a probabilistic deprivation is favored over a sure deprivation, a definite gain is preferred to a probabilistic gain.

What is the most important point of prospect theory?

The key premise of prospect theory, Tversky and Kahneman's most important theoretical contribution, is that choices are evaluated relative to a reference point, e.g., the status quo. The second assumption is that people are risk-averse about gains (relative to the reference point) but risk-seeking about losses.