Published Online: 15 JUN 2010
Copyright © 2010 John Wiley & Sons, Inc. All rights reserved.
Wiley Encyclopedia of Operations Research and Management Science
How to Cite
Chiu, A. and Wu, G. 2010. Prospect Theory. Wiley Encyclopedia of Operations Research and Management Science. .
- Published Online: 15 JUN 2010
Prospect theory is a descriptive theory of how individuals choose among risky alternatives. The theory challenged the conventional wisdom that economic decision makers are rational expected utility maximizers. We present a number of empirical demonstrations that are inconsistent with the classical theory, expected utility, but can be explained by prospect theory. We then discuss the prospect theory model, including the value function and the probability weighting function. We conclude by highlighting several applications of the theory.
- probability weighting function;
- reflection effect;
- invariance assumption;
- loss aversion;
- independence axiom