### Prospect theory, developed by Kahneman and Tversky

The theory states we have an irrational tendency to be less willing to gamble with profits than with losses

• Situation 1

Option 1: 75% you make $1000, 25% you make$0

Option 2: Or 100 percent chance of making $750 • Situation 2 Option 1: 75% you lose$1000, 25% you lose $0 Option 2: Or 100 percent chance of losing$750

Most people choose option 2 in situation 1 and option 1 in situation 2, although the expected values in both options (in both situations) are equal.

[P(1-x)] (1+x) = P(1-x^2) < P
[P(1+x)] (1-x) = P(1-x^2) < P