Prospect theory

Deals with gains and losses as perceived by those who stand to gain or lose. In situations in which gains or looses are likely to be experienced, a reference point is necessary to establish the amount of gain or loss. It provides a view different from the pure economic assumption that individuals make decisions that maximize utility. For example, in prospect theory, what matters is the point from which gains and losses are measured, that gains are valued less than losses and that the manner in which the gains and losses are attained matters greatly in the decision process.