Overview

The two basic premises of prospect theory are that the disutility of a loss exceeds the utility from a comparatively sized gain, and that differences, contrast or changes are more salient than absolute values.  These premises imply that the standard economic theory of rational choice is wrong. 

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Key Citations

Kahneman, Daniel and Amos Tversky (1979), "Prospect Theory: An Analysis of Decision under Risk," Econometrica, 47 (2), 263-291.

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Application Areas

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Other Literature

Hardie, Bruce, Eric J. Johnson, and Peter S. Fader (1993), "Modeling Loss Aversion and Reference Dependence Effects," Marketing Science, 12 (4), 378-394.

Tversky, Amos and Daniel Kahneman (1991), "Loss Aversion in Riskless Choice: A Reference-Dependent Model," Quarterly Journal of Economics, 106 (4), 1039-1062.

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