ABSTRACT
This chapter outlines the theoretical model that explains these cognitive operations, distortions, and the empirical evidence that supports the model. It explains the prospect theory and the four-fold pattern and discusses the framing effects and the idea that losses loom larger than gains. The notion of regret has a role to play in a psychological theory of decision making, the most fruitful direction might be to supplement prospect theory rather than replace it. The chapter also introduces the main psychological theory of choice behaviour, prospect theory. It covered preference reversals and their potential explanation via compatibility and evaluability. As well as fitting a range of empirical studies, the idea that people evaluate outcomes in terms of changes of wealth rather than final states of wealth has strong parallels in psychophysics. The chapter concluded by discussing Ellsberg's problem, and noted his proposal that decision makers have a basic aversion to uncertainty or ambiguity.
