A theory that describes decision-making when risk is perceived.
Prospect theory states that people make decisions based on the potential value of losses and gains, rather than the final outcome.
Further, that in our evaluation, our evaluation of the consequence of losses is greater than the gains. The prospect of losing $100 is more painful than the prospect of winning $100 is pleasant. In general, this could be interpreted as an understanding that the mind is more pain-averse than it is pleasure-attracted.
Prospect theory explains the mechanisms behind a number of cognitive biases such as Sunk-cost bias - our unwillingness to let go of things we've invested in.
Some examples of prospect theory in action;
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