Prospect theory is a theory of behavioral economics and behavioral finance that was developed by Daniel Kahneman and Amos Tversky in 1979. … In the original formulation of the theory, the term prospect referred to the predictable results of a lottery.

What is the meaning of prospect theory?

The prospect theory says that investors value gains and losses differently, placing more weight on perceived gains versus perceived losses. An investor presented with a choice, both equal, will choose the one presented in terms of potential gains. Prospect theory is also known as the loss-aversion theory.

What are the 3 key features of prospect theory?

This moves us onto the 3 main factors that influence decision making in prospect theory. They are; certainty, isolation effect, and loss aversion.