The authors challenge expected utility theory by showing that people evaluate risky choices through gains, losses, and decision weights rather than final wealth. They highlight certainty and isolation effects, explaining why losses loom larger and small probabilities can make gambling or insurance attractive.
Prospect Theory: An Analysis of Decision Under Risk
Daniel Kahneman
Research
29 Pages
Key Takeaways
Certainty Changes Choices: 82% preferred a certain 2,400, yet 83% selected the riskier option after certainty was removed.
Probability Framing Matters: 80% chose a certain 3,000, while 65% favored a 20% chance of receiving 4,000 when both choices became uncertain.
Small Odds Attract: 73% preferred a 0.1% chance of receiving 6,000 over a 0.2% chance of receiving 3,000.
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