Prospect theory is a
behavioral economic theory that describes the way people choose between
probabilistic alternatives that involve
risk, where the probabilities of outcomes are known. The theory states that people make decisions based on the potential value of losses and
gains rather than the final outcome, and that people evaluate these losses and gains using certain
heuristics. The model is
descriptive: it tries to model real-life choices, rather than
optimal decisions, as normative models do.