Psychology of Decisions
What is Prospect Theory?
Kahneman and Tversky's account of how people actually weigh gains, losses, and risk - from a reference point, with losses looming larger than gains.
Go deeper
Read the full deep-dive that explains Prospect Theory in context - with examples, mechanics, and where it breaks.
Related terms
- System 1 Thinking Fast, automatic, effortless thinking that handles most daily decisions using shortcuts; efficient but predictably error-prone.
- System 2 Thinking Slow, deliberate, effortful analysis that can override System 1's errors but tires quickly - which is why good defaults matter so much.
- Heuristic A mental shortcut that makes judgment fast and usually good enough, but fails in predictable, named ways when the situation doesn't fit the rule of thumb.
- Confirmation Bias Noticing and remembering only the evidence that fits what you already believe, while quietly discounting everything that disagrees.
- Anchoring Bias Leaning too hard on the first number you see when estimating something; you adjust away from it but almost never far enough.
- Framing Effect When the wording of a choice changes which option you pick even though the facts are identical - "90% fat-free" and "10% fat" describe the same food.