An International, Modern Replication of Prospect Theory

BrainPost, 26 May 2020

In 1979, Kahneman and Tversky first proposed prospect theory, which describes some principles for how people tend to value and compare financial gains and losses. For example, one aspect of prospect theory is the ‘reflection effect’: people are more likely to act in a risky manner when making decisions about potential gains than about potential losses. Over the past 40 years, prospect theory has become one of the most influential frameworks in behavioral science, specifically in the context of decision-making under risk. The original study involved 20 items involving two financial choices occurring at a certain probability (e.g., would you prefer an 80% chance of receiving $4,000 or a 100% guarantee of receiving $3,000). Kahneman and Tversky organized these 20 items into 13 contrast pairs. While prospect theory has subsequently had huge impacts on science, industry, and policy, it (and many other canonical theories) has been criticized for small samples, over-interpretation of findings, and failures to replicate. Read more.