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Prospect theory

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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, in 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.

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