What Is Prospect Theory?

Prospect theory is the application of comprehensive insights from the field of psychological research to economics, and has made outstanding contributions to human judgment and decision-making under uncertain conditions. Starting from the psychological characteristics and behavior characteristics of people, the irrational psychological factors that influence the choice behavior are revealed.

Outlook theory

1979

This theory is intended to replace

Suppose a person's mathematical function (PT function) to measure the gain and loss of decision is: U = (p1) v (x1) + (p2) v (x2) + ... + (pn) v (xn) Among x1 x2 ... xn are the possible results, and p1, p2 ... pn are the probability that these results occur. v is the so-called " value function ", which represents the relative value of different possible outcomes in the minds of decision makers. According to this theory,

Three basic conclusions derived from this theory

1 Most people are risk averse when facing profit;

2 Most people are risky when facing losses;

3 Most people's judgment of gain and loss is often based on reference points

In short, people are reluctant to take risks when they are profitable; everyone is an adventurer when they are facing losses. The loss and profit are relative to the reference point. Changing the reference point when evaluating things will change the attitude to risk.