Economics Prospect Theory Questions
Probability weighting in Prospect Theory refers to the tendency of individuals to subjectively evaluate and assign different weights to probabilities when making decisions under uncertainty. According to Prospect Theory, individuals tend to overweight small probabilities and underweight large probabilities. This means that individuals perceive small probabilities of an event occurring to be larger than they actually are, while perceiving large probabilities to be smaller than they actually are. This bias in probability weighting influences decision-making by affecting the perceived value of potential outcomes and can lead to risk-seeking behavior for losses and risk-averse behavior for gains.