Economics Prospect Theory Questions
Prospect Theory is a behavioral economic theory that seeks to explain how individuals make decisions under uncertainty. It suggests that people evaluate potential gains and losses relative to a reference point, rather than in absolute terms. According to Prospect Theory, individuals are risk-averse when it comes to potential gains, but risk-seeking when it comes to potential losses. It also proposes that people tend to overweight small probabilities and underweight large probabilities when making decisions.