Prospect theory explains these irrational decisions from "summary" of Advances in Behavioral Finance by Richard H. Thaler
Prospect theory, developed by Kahneman and Tversky, offers a framework to understand why individuals make irrational decisions when faced with uncertainty. Traditional economic theory assumes that individuals are rational and always make decisions that maximize their utility. However, Prospect theory challenges this assumption by suggesting that individuals evaluate potential outcomes relative to a reference point, such as their current wealth or status quo. According to Prospect theory, individuals are risk-averse when faced with gains and risk-seeking when faced with losses. This asymmetry in decision-making can lead to irrational b...
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