Prospect theory
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Definition
A descriptive model of choice under risk in which value is defined over changes from a reference point, concave in gains, convex in losses, and steeper in losses than in gains.
Prospect theory in plain English
A client shrugs at a 10,000 paper gain but panics over a 10,000 paper loss of equal size. Prospect theory describes that pattern: value is judged relative to a reference point, concave in gains, convex in losses, and steeper for losses than for gains. Keep the model exact: a descriptive model of choice under risk in which value is defined over changes from a reference point, concave in gains, convex in losses, and steeper in losses than in gains. It explains behavior; it is not a prescription to ignore capacity or goals.
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