Cmt learning objective 18 prospects theory

Prospect theory provides two key insights about decision making under uncertainty: (1) people use a reference point to evaluate gains and losses rather than final wealth, and (2) people exhibit loss aversion where losses loom larger than equivalent gains. The S-curve reflects how people are risk-averse for gains but risk-seeking for losses. However, prospect theory cannot fully explain all human behavior, such as choices that seem inconsistent with the degree of risk or potential payoffs.