Definition of Prospect theory:
Prospect theory belongs to the behavioral economic subgroup, describing how individuals make a choice between probabilistic alternatives where risk is involved and the probability of different outcomes is unknown. This theory was formulated in 1979 and further developed in 1992 by Amos Tversky and Daniel Kahneman, deeming it more psychologically accurate of how decisions are made when compared to the expected utility theory.
Theory that suggest that individuals place more emphasizes on gains rather than losses and as a result will try to make decisions that contribute to gains. The prospect theory lumps risks into two categories: those that contribute to gains and ones that contribute to losses. Under this theory, people treat the two sections of risk totally different in order to receive a positive outcome. Prospect theory was developed by Daniel Kahneman and Amos Tversky in 1979.
Prospect theory assumes that losses and gains are valued differently, and thus individuals make decisions based on perceived gains instead of perceived losses. Also known as the "loss-aversion" theory, the general concept is that if two choices are put before an individual, both equal, with one presented in terms of potential gains and the other in terms of possible losses, the former option will be chosen.
How to use Prospect theory in a sentence?
- The prospect theory says that investors value gains and losses differently, placing more weight on perceived gains versus perceived losses.
- The prospect theory is part of behavioral economics, suggesting investors chose perceived gains because losses cause a greater emotional impact.
- You need to break down the prospect theory and see if you can utilize it to your businesses advantage in any way.
- An investor presented with a choice, both equal, will choose the one presented in terms of potential gains.
- Prospect theory would explain the choice of focus in the meeting by the director, psychologically some bias can exist in our perception.
- It is important for us to assess every decision we make with strong regards to prospect theory , because we must understand the types of risks we associate with.
- The certainty effect says individuals prefer certain outcomes over probable ones, while the isolation effect says individuals cancel out similar information when making a decision.
Meaning of Prospect theory & Prospect theory Definition