Blackwell Reference Online

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Prospect theory ( Kahneman and Tversky, 1979 ; Tversky and Kahneman, 1992 ) has been one of the single most influential behavioral theories of choice, not only in organizational behavior but also in psychology and in economics. It lays out a clear, positive, descriptive theory of how people value different prospects or outcomes. The classic 1979 paper that first articulated prospect theory was published in an economic journal and intended as a critique of expected utility theory. Prospect theory addresses some of the most glaring shortcomings of normative theories such as expected utility theory, which assume that people are rational utility maximizers. Instead, prospect theory offers a more descriptively accurate model of choice. The best‐known feature of prospect theory is the value function it proposes, which specifies the relationship between objective outcome and subjective utility. The S‐shaped value function describes decreasing marginal utility to gains and to losses: finding $10 on the street is good, but finding $20 is not twice as pleasurable; likewise, losing $10 is painful, but losing $20 is not twice as painful. The decreasing marginal utility to gains and losses implies that people will be more risk seeking in their attempts to avoid potential losses than they will in their pursuit of potential gains. In order to understand why this is so, consider the choice between ... log in or subscribe to read full text