Prospect theory illustrates how investors weigh potential gains and losses unequally from "summary" of The Little Book of Behavioral Investing by James Montier
Prospect theory, a concept developed by Kahneman and Tversky, sheds light on how investors tend to evaluate potential gains and losses. According to this theory, individuals have a tendency to be risk-averse when it comes to potential gains and risk-seeking when facing potential losses. In other words, people are more sensitive to losses than gains of an equivalent amount. This asymmetric response to gains and losses can lead investors to make irrational decisions. For example, investors may be more willing to take on risky ...
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