Examples of prospect theory

Prospect theory shows how people react differently based on risk and uncertainty. For example, imagine gaining $1,000, then losing that same $1,000. Which causes a greater emotional reaction? That's part of the premise of prospect theory.

1. What are the applications of prospect theory?
2. How do you explain the prospect theory?
3. Where is prospect theory applied?
4. What are the three basic ideas of prospect theory?

What are the applications of prospect theory?

According to the Prospect Theory, there exist a variety of factors that will lead people to make irrational decisions. That being said, a clear understanding of the reason why and under what conditions people tend to behave irrationally is useful in improving existing services and designing new services.

How do you explain the prospect theory?

The prospect theory says that investors value gains and losses differently, placing more weight on perceived gains versus perceived losses. An investor presented with a choice, both equal, will choose the one presented in terms of potential gains. Prospect theory is also known as the loss-aversion theory.

Where is prospect theory applied?

Prospect theory has been applied to a number of cases in political science, particularly in the area of international relations, and also in the realm of comparative politics.

What are the three basic ideas of prospect theory?

Prospect theory explains the biases that people use when they make such decisions: Certainty. Isolation effect. Loss aversion.