Abstract
Kahneman and Tversky’s prospect theory — people evaluate outcomes vs a reference point; losses loom larger than equivalent gains, bending risk choice.
Kahneman, D., & Tversky, A. (1979). Econometrica, 47(2), 263–292. DOI
Key findings
- Reference point — Utility is gain and loss from a baseline — not absolute wealth.
- Loss aversion — Losses hurt more than gains please — asymmetric value curve.
- Probability weighting — Small probabilities over-weighted — long shots and insurance alike.
- Framing shifts choice — Same outcome, different frame → different risk appetite.
Limits
Formal decision theory — elegant demonstrations; real money and field choices can diverge from lab frames.
Application
When losses loom larger than gains — your reference point is steering the choice, not neutral math. See Cost-benefit matrix.