With the Prospect Theory, in German also new expectation theory mentioned, of Daniel Kahneman and Amos Tversky out of the year 1979 concern it a descriptive decision theory, which represents an alternative to the expectation use theory. It can illustrate deviations like the Allais paradox and the Ellsberg paradox.

The decision-making process with the Prospect Theory is divided into two phases:

1. Editing phase
2. Evaluation phase

Editing phase

In the first phase the information, approximately to decision alternatives, is prepared and simplified. Thus e.g. same consequences of a Lotterie are painted or summarized consequences. In this phase also the point of reference is set, because with the Prospect Theory profits and losses are consulted for the evaluation of a Lotterie and not the final ability as with the expectation use theory. At the end of the editing phase a mental representation (subjectively) of the relevant components of the decision situation which can be processed stands. This result is called decision frame.

Evaluation phase

In the evaluation phase the individual decision consequences and their probabilities of entrance are evaluated: Thus the information is consolidated to each alternative to a so-called total value. At the end of this phase the decision stands for that alternative with the highest total value.

Characteristics

The crucial aspects of the Prospect Theory are:

1. View of profits and losses
2. Different attitudes to the risk upper and/or below the point of reference. Within the profit range risks and within the loss range are avoided are risk joyful the Entscheider.
3. The value function runs below the point of reference more steeply, which means that losses more heavily weighs than profits, a phenomenon also than loss aversion is designated.
4. The probabilities of the only alternatives are transferred not as such but transformed in an intermediate step nonlinearly. Small probabilities are over-weighted thereby and middle and large probabilities it are under-weighted whereby the participation in Lotterien and the simultaneous conclusion of insurance can be e.g. explained.

The Prospect Theory was developed further 1992 to the Cumulative Prospect Theory, in order to eliminate some weaknesses of the original theory. By the cumulative transformation of the probabilities, stochastically dominated alternatives place no more problem there and the probability weighting function are no longer unstable at the terminator points. The moreover different weighting functions were accepted above and below the point of reference.

Literature

• Kahneman, D. and Tversky, A. (1979): Prospect theory: At analysis OF decision more under risk, Econometrica, volume. 47, No. 2, P. 263-291.
• Tversky, A. and Kahneman, D. (1992): Advances in prospect theory: cumulative representation OF uncertainty. In: Kahneman, D. and Tversky, A. (Hrsg.), (2000): Choices, VALUEs and of frames, Cambridge University press, Cambridge, P. 44-66.

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