Prospect Theory¶
Kahneman, D., & Tversky, A. (1979). Prospect Theory: An Analysis of Decision under Risk. Econometrica, 47(2), 263-291.
Cited by¶
21 citations across 21 artifacts.
Each citation links to the sentence it supports in the citing article.
Primes¶
- Contrast
- Kahneman and Tversky (1979), in their prospect theory, established that decision-makers evaluate outcomes as gains and losses relative to a reference point rather than in absolute terms — making the choice of baseline (and thus the contrast it sets up with the treatment) a constitutive feature of how an effect is perceived and acted on, in A/B tests as in everyday economic judgment.
This sourceOutcomes are evaluated as gains and losses relative to a reference point rather than in absolute terms (diminishing sensitivity, loss aversion) — supports the claim that the choice of baseline, and the contrast it creates with the treatment, is constitutive of perceived value and decision behavior. Vol./pages verified.
Supported in partVerified against the publisher's abstract
The abstract states that value is assigned to gains and losses rather than final assets, which backs the reference-point half of the claim but says nothing about baselines in A/B tests.
“An alternative theory of choice is developed, in which value is assigned to gains and losses rather than to final assets and in which probabilities are replaced by decision weights.”
- Kahneman and Tversky (1979), in their prospect theory, established that decision-makers evaluate outcomes as gains and losses relative to a reference point rather than in absolute terms — making the choice of baseline (and thus the contrast it sets up with the treatment) a constitutive feature of how an effect is perceived and acted on, in A/B tests as in everyday economic judgment.
- Decision
- Decision theory & behavioral economics: Expected utility, subjective expected utility (SEU), Bayesian decision theory, loss aversion, status quo bias, anchoring, availability heuristic, framing effects, preference reversals, revealed vs. stated preference, discrete-choice models — a behavioral catalogue Kahneman and Tversky (1979) anchored in their prospect-theory critique of expected utility.
This sourceCritiques expected-utility theory and develops prospect theory (reference-dependence, diminishing sensitivity, loss aversion).
Supported in partVerified against the publisher's abstract
The 1979 paper's own abstract supplies the critique of expected utility theory and prospect theory (loss aversion, framing via the isolation effect), but not most of the bias catalogue the sentence attaches to it.
“This paper presents a critique of expected utility theory as a descriptive model of decision making under risk, and develops an alternative model, called prospect theory.”
- Decision theory & behavioral economics: Expected utility, subjective expected utility (SEU), Bayesian decision theory, loss aversion, status quo bias, anchoring, availability heuristic, framing effects, preference reversals, revealed vs. stated preference, discrete-choice models — a behavioral catalogue Kahneman and Tversky (1979) anchored in their prospect-theory critique of expected utility.
- Escalation of Commitment
- the distinction between decision-makers who bear direct consequences of escalation (agents) and those who bear remote consequences or political/reputational consequences (principals); (i) recognition of the loss-frame entrapment
This sourceFoundational result: outcomes evaluated as gains/losses relative to a reference point, with loss aversion and risk-seeking over losses.
Supported in partVerified against the publisher's abstract
Supplies prospect theory's reference-point and loss-aversion mechanism (and risk seeking over losses) but says nothing about escalation, entrapment, or an agent-versus-principal divergence.
“The value function is normally concave for gains, commonly convex for losses, and is generally steeper for losses than for gains.”
- the distinction between decision-makers who bear direct consequences of escalation (agents) and those who bear remote consequences or political/reputational consequences (principals); (i) recognition of the loss-frame entrapment
- Expected Utility
- Behavioral economics measures human deviations from this baseline, with prospect theory (Kahneman & Tversky 1979) reformulating the value transform around a reference point and replacing probabilities with decision weights.
This sourceFoundational behavioral-economics result: outcomes evaluated as gains and losses relative to a reference point, with diminishing sensitivity and loss aversion, and probabilities replaced by decision weights (overweighting small probabilities).
SupportedVerified against the publisher's abstract
The paper develops an alternative theory of choice in which "value is assigned to gains and losses rather than to final assets" and in which "probabilities are replaced by decision weights". Valuing outcomes as movements from a baseline rather than as final wealth, and substituting decision weights for probabilities, are the two reformulations the sentence attributes to prospect theory, offered against expected utility theory as a descriptive model. The work's summary does not itself use the term reference point that the sentence uses.
“An alternative theory of choice is developed, in which value is assigned to gains and losses rather than to final assets and in which probabilities are replaced by decision weights.”
- Behavioral economics measures human deviations from this baseline, with prospect theory (Kahneman & Tversky 1979) reformulating the value transform around a reference point and replacing probabilities with decision weights.
- Framing
- This foundational evidence, coupled with prospect theory,
This sourceFoundational result that outcomes are valued as gains and losses relative to a reference point, with diminishing sensitivity and loss aversion; substantiates the reference-point dependence and loss-aversion claims framing rests on.
SupportedVerified against the publisher's abstract
Kahneman and Tversky state that "value is assigned to gains and losses rather than to final assets" and that the value function "is generally steeper for losses than for gains", giving reference dependence and loss aversion. The work is framed as a critique of expected utility theory as a descriptive model, and reports inconsistent preferences when the same choice is presented in different forms, which is the presentation-sensitivity the surrounding passage calls framing.
“An alternative theory of choice is developed, in which value is assigned to gains and losses rather than to final assets and in which probabilities are replaced by decision weights. The value function is normally concave for gains, commonly convex for losses, and is generally steeper for losses than for gains.”
- This foundational evidence, coupled with prospect theory,
- Indifference Curves
- T3 — Behavioral Departures From Standard Preferences: Endowment effects, loss aversion (Kahneman-Tversky 1979)
This sourceFoundational behavioral-economics result: outcomes are evaluated as gains and losses relative to a reference point rather than in absolute terms, with diminishing sensitivity and loss aversion — making the choice of baseline (and the contrast it creates with the treatment) constitutive of perceived value and decision behavior.
Supported in partVerified against the publisher's abstract
The abstract states a value function steeper for losses than for gains (loss aversion), but says nothing of endowment effects, backing only part of the labelled claim.
“The value function is normally concave for gains, commonly convex for losses, and is generally steeper for losses than for gains.”
- T3 — Behavioral Departures From Standard Preferences: Endowment effects, loss aversion (Kahneman-Tversky 1979)
- Loss Aversion
- This functional form, introduced by Kahneman and Tversky (1979)
This sourceFoundational behavioral-economics result: outcomes are evaluated as gains and losses relative to a reference point rather than in absolute terms, with diminishing sensitivity and loss aversion — making the choice of baseline (and the contrast it creates with the treatment) constitutive of perceived value and decision behavior.
SupportedVerified against the publisher's abstract
The paper's abstract describes the prospect-theory value function (concave for gains, convex for losses, steeper for losses), matching the attribution to Kahneman & Tversky (1979).
“An alternative theory of choice is developed, in which value is assigned to gains and losses rather than to final assets and in which probabilities are replaced by decision weights. The value function is normally concave for gains, commonly convex for losses, and is generally steeper for losses than for gains.”
- This functional form, introduced by Kahneman and Tversky (1979)
- Marginal Utility
- Prospect theory, introduced by Kahneman and Tversky (1979)
This sourceFoundational behavioral-economics result: outcomes are evaluated as gains and losses relative to a reference point rather than in absolute terms, with diminishing sensitivity and loss aversion — making the choice of baseline (and the contrast it creates with the treatment) constitutive of perceived value and decision behavior.
- Prospect theory, introduced by Kahneman and Tversky (1979)
- Optimism Bias
- Paradox
- … Allais paradox (observed choice patterns violate independence axiom); Ellsberg paradox (ambiguity aversion); Arrow's theorem revealing paradoxes of social choice (no voting system satisfies all desirable properties simultaneously); money-pump arguments against intransitive preferences; resolution via prospect theory
This sourceFoundational behavioral-economics result: outcomes are evaluated as gains and losses relative to a reference point rather than in absolute terms, with diminishing sensitivity and loss aversion — making the choice of baseline (and the contrast it creates with the treatment) constitutive of perceived value and decision behavior.
- … Allais paradox (observed choice patterns violate independence axiom); Ellsberg paradox (ambiguity aversion); Arrow's theorem revealing paradoxes of social choice (no voting system satisfies all desirable properties simultaneously); money-pump arguments against intransitive preferences; resolution via prospect theory
- Preference
- Each presupposes the bare preference relation and adds structured deviations from the linear-in-magnitudes baseline.
This sourceFoundational behavioral-economics result: outcomes are evaluated as gains and losses relative to a reference point rather than in absolute terms, with diminishing sensitivity and loss aversion — making the choice of baseline (and the contrast it creates with the treatment) constitutive of perceived value and decision behavior.
Supported in partVerified against the publisher's abstract
Supplies the alternative-to-expected-utility framing in which value attaches to gains and losses rather than final assets, with a value function concave for gains and convex for losses, but not the presupposed bare preference relation.
“An alternative theory of choice is developed, in which value is assigned to gains and losses rather than to final assets and in which probabilities are replaced by decision weights.”
- Each presupposes the bare preference relation and adds structured deviations from the linear-in-magnitudes baseline.
- Reference-Point Dependence
- The identifying claim concerns a second variable that ordinary talk about outcomes does not carry: leave the outcome exactly where it is, move the reference alone, and the same state is reclassified — gain to loss, improvement to deterioration, adequate to failing — with nothing about the world having changed.
This sourceEstablishes that outcomes are evaluated as gains and losses against a movable reference point rather than as final states.
Supported in partVerified against the publisher's abstract
The abstract supports evaluating outcomes as gains and losses against a reference rather than as final assets, but not that moving the reference alone, outcome fixed, reclassifies the same state.
“An alternative theory of choice is developed, in which value is assigned to gains and losses rather than to final assets and in which probabilities are replaced by decision weights.”
- The identifying claim concerns a second variable that ordinary talk about outcomes does not carry: leave the outcome exactly where it is, move the reference alone, and the same state is reclassified — gain to loss, improvement to deterioration, adequate to failing — with nothing about the world having changed.
- Risk Aversion
- Risk–Return Tradeoff
- However, Kahneman-Tversky
This sourceFoundational behavioral-economics result: outcomes are evaluated as gains and losses relative to a reference point rather than in absolute terms, with diminishing sensitivity and loss aversion — making the choice of baseline (and the contrast it creates with the treatment) constitutive of perceived value and decision behavior.
Supported in partVerified against the publisher's abstract
Prospect theory's abstract critiques expected-utility decision making under risk; it says nothing about risk-return equilibrium, anomalies or bubbles.
“This paper presents a critique of expected utility theory as a descriptive model of decision making under risk, and develops an alternative model, called prospect theory.”
- However, Kahneman-Tversky
- Sunk Cost and Irreversible Commitment
- The magnitude of committed resources (time, money, emotional investment, organizational capital) creates an asymmetry: reversal feels costly and loss-laden, even when rational analysis shows the investment is already gone and irrelevant to forward-looking decisions, an asymmetry rooted in the value-function curvature Kahneman and Tversky (1979) formalized in prospect theory.
This sourceFoundational behavioral-economics result: outcomes are evaluated as gains and losses relative to a reference point rather than in absolute terms, with diminishing sensitivity and loss aversion — making the choice of baseline (and the contrast it creates with the treatment) constitutive of perceived value and decision behavior.
Supported in partVerified against the publisher's abstract
Kahneman & Tversky's own abstract states the value-function curvature (concave for gains, convex and steeper for losses), which backs the loss-aversion basis of the claim but not its sunk-cost or reversibility application.
“The value function is normally concave for gains, commonly convex for losses, and is generally steeper for losses than for gains.”
- The magnitude of committed resources (time, money, emotional investment, organizational capital) creates an asymmetry: reversal feels costly and loss-laden, even when rational analysis shows the investment is already gone and irrelevant to forward-looking decisions, an asymmetry rooted in the value-function curvature Kahneman and Tversky (1979) formalized in prospect theory.
- Uncertainty
- The Ellsberg paradox
This sourceFoundational behavioral-economics result: outcomes are evaluated as gains and losses relative to a reference point rather than in absolute terms, with diminishing sensitivity and loss aversion — making the choice of baseline (and the contrast it creates with the treatment) constitutive of perceived value and decision behavior.
- The Ellsberg paradox
Domain-specific¶
- Allais Paradox
- The structural source of the violation is the certainty effect: respondents overweight outcomes that are certain relative to those that are merely highly probable
This sourceProspect theory's account in which probabilities are replaced by decision weights and the overweighting of low probabilities contributes to the attractiveness of both insurance and gambling.
SupportedVerified against the publisher's abstract
“people underweight outcomes that are merely probable in comparison with outcomes that are obtained with certainty. This tendency, called the certainty effect, contributes to risk aversion in choices involving sure gains and to risk seeking in choices involving sure losses.”
- The structural source of the violation is the certainty effect: respondents overweight outcomes that are certain relative to those that are merely highly probable
- Certainty Effect
- The certainty effect is the empirical regularity, formalized within Kahneman and Tversky's prospect theory, that human decision-makers overweight outcomes they consider certain relative to outcomes of equal expected value that are merely probable, producing choices that violate the independence axiom of expected utility theory.
Supported in partVerified against the publisher's abstract
“people underweight outcomes that are merely probable in comparison with outcomes that are obtained with certainty”
- The certainty effect is the empirical regularity, formalized within Kahneman and Tversky's prospect theory, that human decision-makers overweight outcomes they consider certain relative to outcomes of equal expected value that are merely probable, producing choices that violate the independence axiom of expected utility theory.
- Cumulative Prospect Theory
- Probability Weighting Function
- A chooser prefers a sure outcome to a slightly larger outcome with very high probability, yet reverses the preference when both probabilities are scaled down proportionally
This sourceKahneman and Tversky's Problems 3 and 4, where 80 percent chose 3,000 for certain over 4,000 at p = .80 while 65 percent reversed to 4,000 at p = .20 over 3,000 at p = .25 - the common-ratio reversal exactly as described.
SupportedVerified against the source
- A chooser prefers a sure outcome to a slightly larger outcome with very high probability, yet reverses the preference when both probabilities are scaled down proportionally
- Pseudocertainty Effect
- Neither should be misreported as the other's exact monetary experiment.
This sourceOriginal monetary amounts are 3,000 and 4,000.
- Neither should be misreported as the other's exact monetary experiment.
Verification¶
Does it exist? Confirmed. This work's DOI resolves to a registered record, which fixes its identity. That is all it fixes.
Does it back the claim? Read against the text for 14 of 21 citations: 5 supported, 9 supported in part. Each verdict is shown under its citation below, with what in the work backs the sentence.
Support is checked per citation rather than per work — the same source can be cited soundly in one article and wrongly in another. Per-citation recording began recently, so a citation with no recorded check is a gap in the record rather than evidence it went unchecked.
See how references were verified.
Links previously used in the corpus¶
Before the registry existed this work was also linked 2 other ways.
- https://web.mit.edu/curhan/www/docs/Articles/15341_Readings/Behavioral_Decision_Theory/Kahneman_Tversky_1979_Prospect_theory.pdf ×1
- https://www.jstor.org/stable/1914185 ×1
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