Psychologycalendar_todayLast updated: Apr 2026
What is Prospect Theory?
/ˈprɒspɛkt ˈθɪəri/
Prospect theory describes how people evaluate potential gains and losses asymmetrically — losses feel roughly twice as painful as equivalent gains feel pleasurable. It is the foundation of modern behavioural economics.
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Everyday Example
Losing £100 triggers more psychological pain than winning £100 brings joy. This asymmetry makes people irrationally risk-averse for gains and risk-seeking to avoid losses.
publicReal-World Application
“Investors hold losing stocks too long (hoping to avoid realising the loss) and sell winning stocks too early (locking in the gain) — a directly costly application of prospect theory.”
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Did you know?
Developed by Daniel Kahneman and Amos Tversky in 1979, prospect theory overturned the assumption that humans make rational economic decisions. It helped Kahneman win the Nobel Prize in Economics in 2002.
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Key Insight
Prospect theory's loss aversion explains why "avoid losing £100" is a stronger motivator than "gain £100" — and why the same policy framed as a loss reduction outperforms one framed as a gain.
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