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What is Prospect Theory? How users make Decisions under Risk

swati11 on Finance

https://blog.finology.in - Prospect theory explains how people make decisions under uncertainty. Read the article to know how loss aversion bias, sunk cost fallacy and status quo bias are linked with Prospect theory.
Greed and Fear are two of the most common, severe emotions found in any human being. When we are guided by greed or fear in times of uncertainty, making decisions can sometimes be a real challenge.

For example, Have you ever noticed that most of the people do not invest when markets are going down? Do you know why? Yes, you are right. That's because of their fear.

And today, markets are going up with all the reasons why people must invest, which is because of greed. Knowing about greed and fear is one thing, but how we make decisions when we are guided by greed or fear in times of uncertainty is the real challenge.

It's the work of two Economists, Daniel Kahneman and Amos Tversky, who received the Nobel Prize in 2002 for their work in behavioral finance. They gave the prospect theory, which is one of the pillars of behavioral finance.

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