Prospect Theory’s Focus on Gains, Losses, and Framing

Abstract

People make decisions about which risks to assume based both on how they feel and how they think. When the Nobel committee announced in 2002 that psychologist Daniel Kahneman would be a Nobel laureate, they singled out work he had done with his late colleague Amos Tversky. Together, Kahneman and Tversky developed a framework they called “prospect theory,” which provides great insight into the cognitive aspects associated with the psychology of risk.¹