Prospect theory challenges traditional economic theory from "summary" of Thinking, Fast and Slow by Daniel Kahneman
Traditional economic theory assumes that individuals are rational decision-makers who carefully weigh the costs and benefits of each option before making a choice. This theory suggests that people make decisions based on the expected value of the outcomes and strive to maximize their utility. However, Prospect theory challenges this assumption by proposing that individuals do not always make rational decisions when faced with uncertainty.
According to Prospect theory, people tend to evaluate potential losses and gains in a non-linear way, placing more emphasis on avoiding losses than on achieving gains. This asymmetry in decision-making can lead to risk aversion when faced with potent...
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