Prospect theory, developed by psychologists Daniel Kahneman and Amos Tversky, is a behavioral economics concept that explores how individuals make decisions under uncertainty. It suggests that people often deviate from traditional economic rationality, exhibiting risk aversion when faced with potential gains and risk-seeking behavior when confronted with potential losses.
In other words, individuals tend to evaluate potential outcomes based on perceived gains or losses from a reference point rather than absolute values.
This departure from classical economic assumptions helps explain various decision-making patterns and has significant implications for understanding economic behavior and policy.