Prospect Theory: An Analysis of Decision under Risk
Daniel Kahneman, Amos Tversky
Econometrica · 1979
Abstract
The bedrock paper of behavioral economics, presenting an alternative to expected utility theory. It shows that human beings make decisions based on the potential value of losses and gains rather than the final outcome, evaluating these choices relative to a subjective reference point.
Methodology
Subjecting participants to hypothetical choice problems involving varying levels of risk, probability, and payouts. Responses were systematically analyzed to expose departures from rational choice theory.
Findings
Discovered three key principles: (1) Reference Dependence (outcomes are compared to a baseline); (2) Loss Aversion (losses loom larger than gains); and (3) Non-linear Probability Weighting (people over-weight small probabilities and under-weight large ones).
Applied nudge
Reframe standard value propositions by highlighting what is lost rather than what is gained, and position user progress relative to a custom reference point.
Citation
Kahneman, D., & Tversky, A. (1979). Prospect theory: An analysis of decision under risk. Econometrica, 47(2), 263-291.