Prospect Theory

Prospect theory is an important deviation from normative behavior because it describes a wide range of choices under uncertainty. Most choices people make are under varying degrees of uncertainty, since no one can ever have perfect knowledge of a situation. Prospect theory further demonstrates that humans are inherently poor with probabilities and that people can have intransitive preferences because they view each situation as a gain/loss rather than a change from state of wealth to another. When given a choice between getting $1000 with certainty or having a 50% chance of getting $2500…