The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Prospect Theory

  • Graham Loomes
Reference work entry


Prospect theory sought to provide a descriptive model of risky choice which could accommodate a number of seemingly systematic violations of conventional ‘expected utility’ analysis. Although there are phenomena which the model cannot explain (even in its later ‘cumulative’ form), it constitutes a landmark in the development of alternative theories which have modified standard theory and/or have tried to incorporate psychological factors into decision theories.


Allais paradox Behavioural economics Choice Common consequence effect Common ratio effect Cumulative prospect theory Decision weights Expected utility hypothesis Isolation effect Kahneman, D. Probability distribution Prospect theory Rational behaviour Reference point Reflection effect Stochastic dominance Subjective probability Transitivity Tversky, A 

JEL Classifications

This is a preview of subscription content, log in to check access.


  1. Allais, M. 1953. Le comportement de l’homme rationnel devant le risque: critique des postulats et axiomes de l’école américaine. Econometrica 21: 503–546.CrossRefGoogle Scholar
  2. Birnbaum, M. 2006. Evidence against prospect theories in gambles with positive, negative and mixed consequences. Journal of Economic Psychology 27: 737–761.CrossRefGoogle Scholar
  3. Humphrey, S. 1995. Risk aversion or event-splitting effects? More evidence under risk and uncertainty. Journal of Risk and Uncertainty 11: 263–274.CrossRefGoogle Scholar
  4. Kahneman, D., and A. Tversky. 1979. Prospect theory: An analysis of decision under risk. Econometrica 47: 263–291.CrossRefGoogle Scholar
  5. Kim, E., A. Morse, and L. Zingales. 2006. What has mattered to economics since 1970. Journal of Economic Perspectives 20(4): 189–202.CrossRefGoogle Scholar
  6. Quiggin, J. 1982. A theory of anticipated utility. Journal of Economic Behavior and Organization 3: 323–343.CrossRefGoogle Scholar
  7. Starmer, C. 1999. Cycling with rules of thumb: An experimental test for a new form of non-transitive behaviour. Theory and Decision 46: 139–157.CrossRefGoogle Scholar
  8. Starmer, C. 2000. Developments in non-expected utility theory: The hunt for a descriptive theory of choice under risk. Journal of Economic Literature 38: 332–382.CrossRefGoogle Scholar
  9. Tversky, A., and D. Kahneman. 1992. Advances in prospect theory: Cumulative representation of uncertainty. Journal of Risk and Uncertainty 5: 297–323.CrossRefGoogle Scholar
  10. von Neumann, J., and O. Morgenstern. 1944. Theory of games and economic behavior. Princeton: Princeton University Press.Google Scholar

Copyright information

© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • Graham Loomes
    • 1
  1. 1.