# Prospect theory

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Revision as of 10:19, 9 July 2011 by Vladimir Nesov (talk | contribs) (→Blog posts: added Yvain's post)

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 based on 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.

## Blog posts

- Shane Legg on prospect theory and computational finance by Roko
- Prospect Theory: A Framework for Understanding Cognitive Biases by Yvain