Prospect theory is a descriptive model of decision-making under risk and uncertainty that suggests individuals evaluate outcomes based on perceived gains and losses relative to a reference point, rather than absolute outcomes. The theory proposes a value function that is concave for gains (risk aversion) and convex for losses (risk seeking), with a steeper slope for losses than for gains, reflecting loss aversion.The sources highlight several key learnings:
●Individuals' risk attitudes vary depending on whether they perceive themselves to be in the domain of gains or losses. eg, someone may be risk-averse when considering potential gains but risk-seeking when facing potential losses.
●Observational evidence alone is often insufficient to differentiate prospect theory from alternative models, such as disappointment aversion.411 More rigorous testing methods, such as carefully designed experiments, may be needed to provide robust support for prospect theory.
●Prospect theory has multiple variants and calibrations, making it challenging to determine which specific components of the theory are being tested and supported by evidence. This complexity requires careful consideration of the internal structure of the theory and the potential for heterogeneity across individuals.

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