ECONOMETRICA Ⅴ OLUME47 MARCH 1979 NUMBER 2 PROSPECT THEORY: AN ANALYSIS OF DECISION UNDER RISK BY DANIEL KAHNEMAN AND AMOS TVERSKY jue of expected utility theory as a descriptive model of decision making under risk, and develops an alternative model, called prosp hoices among risky prospects exhibit several pervasive effects that are inconsistent with the basic tenets of utility theory. In particular, people underweight outcomes that are erely probable in comparison with outcomes that are obtained with certainty. This gains and to risk seeking in choices involving sure losses. In addition, people general discard components that are shared by all prospects under consideration. This tendency called the isolation effect, leads to inconsistent prefe presented in different forms. An alternative theory of choice is developed, in which valt assigned to gains and losses rather than to final assets and in which probabilities are eplaced by decision weights. The value function is normally concave for gains, commonly nvex for losses, and is generally steeper for losses than for gains. Decision weights are enerally lower than the corresponding probabilities, except in the range of low prob abilities. Overweighting of low probabilities may contribute to the attractiveness of both nsurance and gambling 1. IN EXPECTED UTILITY THEORY has dominated the analysis of decision making under risk. It has been generally accepted as a normative model of rational choice [24], and widely applied as a descriptive model of economic behavior, e. g. [15, 4 Thus, it is assumed that all reasonable people would wish to obey the axioms of the theory [47, 36], and that most people actually do, most of the time The present paper describes several classes of choice problems in which preferences systematically violate the axioms of expected utility theory. In the ight of these observations we argue that utility theory, as it is commonly terpreted and applied, is not an adequate descriptive model and we propose an alternative account of choice under risk Decision making under risk can be viewed as a choice between prospects or gambles. A prospect(x1, Pi;.;n, Pn)is a contract that yields outcome x; with probability Pi, where Pi+P2+.. +pn=1. To simplify notation, we omit null outcomes and use(x, p)to denote the prospect(x, p; 0, 1-p) that yields x with probability p and o with probability 1-p. The (riskless) prospect that yields with certainty is denoted by(x). The present discussion is restricted to prospects with so-called objective or standard probabilities The application of expected utility theory to choices between prospects is based three t Expectation: U(1, Pi;...;xn, pn)=pu(x1)+..+pnu(xn <A 'This work was supported in part by grants from the Harry F, Guggenheim Foundation and from Naval Research under Contract N00014-78-C-0100(ARPA Order No 3469)under Subcontract 78-072-0722 from Decisions and Designs, Inc. to Perceptronics, Inc. We also thank the Center for Advanced Study in the Behavioral Sciences at Stanford for its support