PROSPECT THEORY: AN ANALYSIS OF DECISION UNDER RISK ECoNome mea (pre-/9 6i: Ma 1979: 47, 2: ABVINFORM Global ECONOMETRICA VOLUME 47 MARCH 1979 NUMBER 2 PROSPECT THEORY: AN ANALYSIS OF DECISION UNDER RISK BY DANIEL KAHNEMAN AND AMOS TVERSKY ndency, called the certainty effect, contr losses. In addition, people general nsurance and gambling 1. INTRODUCTION EXPECTED UTILITY THEORY has dominated the analysis of nmaking under risk. It has been generally accepted ormative model onal choice [24 and widely applied as a descriptive model of economic or,eg.[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 light of these observations we argue that utility theory, as it is common interpreted and applied is not an adequate descriptive model and we propose an alternative account of choice under risk 2. CRITIQUE Decision making under risk can be viewed as a choice between prospects or gambles. a prospect(x1, Pi;...; xm, Pa)is a contract that yields outcome x with probability pi, where p+p2+,,,+Pa =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 x th 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 n the following three tenets (i)Expectation: U(x1, Pi;...;tm, Pn)=Piu(x1)+..+pnu(a,n) his work was supported in part by grants from the Harry F Guggenheim Foundation and from 8-072-0722 from Decisions and Designs, Inc. to Perceptronies, Ine. We also thank the Center Advanced Study in the Behavioral Sciences at Stanford for its support Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. PROSPECT THEORY: AN ANALYSIS OF DECISION UNDER RISK DANIEL KAHNEMAN; AMOS TVERSKY Econometrica (pre-1986); Mar 1979; 47, 2; ABI/INFORM Global pg. 263