Prospect Theory

Prospect Theory is a theory that people value gains and losses differently and, as such, will base decisions on perceived gains rather than perceived losses. Prospect theory is a behavioral economic idea that describes how people choose between probabilistic alternatives which involve risk, in which the probabilities of results are known. The theory states that folks make decisions using the potential value regarding losses and gains as opposed to the final outcome, understanding that people evaluate these kinds of losses and results using certain heuristics.