# Prospect Theory

*Behavioral Finance — Finicade finance glossary*

Prospect theory describes how people actually choose under risk: outcomes judged against a reference point, losses weighted more, small odds overweighted.

Prospect theory describes how people actually choose under risk: gains and losses are judged against a reference point rather than in terms of final wealth, losses weigh more heavily, and small probabilities are overweighted. It won Kahneman a Nobel and replaced expected utility as the descriptive model. The overweighting of tiny probabilities is why the same person buys both lottery tickets and insurance.

**Also known as:** Kahneman and Tversky, value function, reference dependence

**Related terms:** [Loss Aversion](https://finicade.com/glossary/loss-aversion), [Framing Effect](https://finicade.com/glossary/framing-effect), [Marginal Utility](https://finicade.com/glossary/marginal-utility), [Behavioral Biases](https://finicade.com/glossary/behavioral-biases), [Disposition Effect](https://finicade.com/glossary/disposition-effect)

**Taught in:** Mind Over Markets — Value, Not Wealth

Source: https://finicade.com/glossary/prospect-theory