Prospect theory explains decision making under uncertainty from "summary" of Thinking Fast and Slow by Book Summary
Prospect theory provides a framework for understanding how people make decisions when faced with uncertainty. It suggests that individuals do not always behave rationally when assessing potential gains and losses. Instead of evaluating outcomes in absolute terms, they tend to focus on changes from a reference point, such as their current state or expectations.
When faced with a decision involving risk, individuals weigh potential losses more heavily than equivalent gains. This asymmetry in decision-making leads to risk aversion when considering positive outcomes and risk-seeking behavior when facing potential losses. People are generally more willing to take risks to avoid losses than to achieve gains of the same magnitude.
Furthermore, Prospect theory pro...
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