Overview

Prospect theory was developed by Kahneman and Tversky in 1979.

Framework

The axioms of prospect theory can be stated as

• People are generally loss averse
• People can exhibit both risk aversion and risk seeking behaviour, usually dependent on the nature of the prospect. (Here risk aversion is not the same as loss aversion)
• People evaluate prospects with reference to a reference point or anchor, as opposed to in absolute terms