The value function is normally concave for gains, commonly convex for losses, and is generally steeper for losses than for gains. In the paper, “Prospect Theory: An Analysis of Decision Under Risk” published on Econometrica on March 1979, Nobel Prize winning economist Daniel Kahneman, and Amos Tversky presented ‘a critique of Expected Utility Theory’ saying that it cannot be taken as an adequate descriptive model for decision making under risk, and developed an alternative model called Prospect Theory. All Rights Reserved. Definition: The prospect theory describes how people choose between different options (or prospects) and how they estimate (many times in a biased or incorrect way) the perceived likelihood of each of these options. The editing phase is the initial analysis of the prospects oered, which is simplied at this stage. Prospect theory: An analysis of decision under risk. For example, for some individuals, the pain from losing $1,000 could only be Prospect theory: An analysis of decisions under risk (1979) Cached. 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. The literature review centers on leading articles that either examine aspects of Prospect Theory itself or use Prospect Theory as a basis for other areas of research. It shows that individuals think in terms of expected utility relative to a reference point as opposed to absolute results. Prospect Theory: An Analysis of Decision under Risk by Daniel Kahneman and Amos Tversky Econometrica, 47(2) ... Reproduced with permission of the copyright owner. 2 (Mar., 1979), pp. 0 Abstract. Prospect theory is based on how we make decisions in terms of uncertainty, how we make decisions when we face risk, and how we behave in our personal and investing decisions when greed and fear catch us. The framework assumes that all reasonable people would wish to obey its axioms and that most people actually do, most of the time. Amos Tversky, Daniel Kahneman. Prospect Theory: An Analysis of Decision Under Risk 1979 This article presents prospect theory, a descriptive theory of decision making under uncertainty, and an alternative to expected utility theory to understand choice. Prospect theory has been shown to be the most appropriate theory for decision making under risk for economic problems [4]. endstream endobj startxref ©2000-2021 ITHAKA. Check out using a credit card or bank account with. option. Prospect theory has emerged as a leading alternative to expected utility as a theory of decision under risk and has very recently begun to attract attention in the literature on international relations. Decision weights are generally lower than the corresponding probabilities, except in the range of low probabilities. E C O N OMETRICA I C I VOLUME 47 MARCH, 1979 NUMBER 2 PROSPECT THEORY: AN ANALYSIS OF DECISION UNDER RISK BY DANIEL KAHNEMAN AND AMOS TVERSKY' 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. © 1979 The Econometric Society 47. Read your article online and download the PDF from your email or your account. Prospect theory involves two phases in the decision making process: an early phase of editing and a subsequent phase of evaluation. 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