Kahneman, Daniel; Tversky, Amos Prospect theory: an analysis of decision under risk. (English) Zbl 0411.90012 Econometrica 47, 263-291 (1979). Summary: This paper presents a critique of expected utility theory as a descriptive model of decision making under risk, and develops an alternative model, called prospect theory. Choices among risky prospects exhibit several pervasive effects that are inconsistent with the basic tenets of utility theory. In particular, people underweight outcomes that are merely probable in comparison with outcomes that are obtained with certainty. This tendency, called the certainty effect, contributes to risk aversion in choices involving sure gains and to risk seeking in choices involving sure losses. In addition, people generally discard components that are shared by all prospects under consideration. This tendency, called the isolation effect, leads to inconsistent preferences when the same choice is presented in different forms. An alternative theory of choice is developed, in which value is assigned to gains and losses rather than to final assets and in which probabilities are replaced by decision weights. The value function is normally concave for gains, commonly convex for losses, and is generally steeper for losses than for gains. Decision weights are generally lower than the corresponding probabilities, except in the range of low probabilities. Overweighting of low probabilities may contribute to the attractiveness of both insurance and gambling. Page: −5 −4 −3 −2 −1 ±0 +1 +2 +3 +4 +5 Show Scanned Page Cited in 38 ReviewsCited in 1323 Documents MSC: 91B16 Utility theory 91B08 Individual preferences Keywords:prospect theory; decision under risk; expected utility theory; decision making; certainty effect; risk aversion; isolation effect; inconsistent preferences; decision weights; insurance; gambling PDF BibTeX XML Cite \textit{D. Kahneman} and \textit{A. Tversky}, Econometrica 47, 263--291 (1979; Zbl 0411.90012) Full Text: DOI Link OpenURL