Prospect Theory

Rose McDermott

This entry discusses the most prominent psychological theory of decision making under conditions of risk, called prospect theory . It was developed by the psychologists Daniel Kahneman and Amos Tversky to explain decision making under conditions of risk, originally published in 1979 in Econometrica . Kahneman won the Nobel Prize in Economics in 2002 for the work he conducted in this area with Tversky, who died in 1996. This work represents the apex of models of cognitive psychology in both timing and importance. The model has been imported into a number of fields and has been used to analyze various aspects of political decision making, especially in international relations. Prospect theory was developed in explicit opposition to theories of rational choice based on more normative assumptions. The intuition that guided the original work grew out of insights into the nature of bounded rationality and a desire to explore the nature ...

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