Prospect theory explains how individuals evaluate risk and reward from "summary" of Beyond Greed and Fear:Understanding Behavioral Finance and the Psychology of Investing by Hersh Shefrin
Prospect theory provides a framework for understanding how people make decisions in situations involving risk and uncertainty. According to this theory, individuals do not evaluate outcomes in absolute terms, but rather in relation to a reference point. This reference point can be influenced by a variety of factors, such as past experiences, expectations, or social norms. When evaluating potential outcomes, individuals tend to focus more on potential losses than on potential gains. This asymmetry in decision-making is known as loss aversion. People are generally more sensitive to losses than to equivalent gains, leading them to take greater risks in order to avoid losses. In addition t...
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