ABSTRACT
The previous chapter explored some of the limits on rationality which explain heuristics and biases seen in everyday decision-making. This literature is discursive and intuitive in style, and so vulnerable to a criticism that it lacks objective rigour. In response, Kahneman and Tversky (1979) developed these insights to construct their own alternative to the standard approach to decision-making captured by expected utility theory (EUT). Kahneman and Tversky argue that a number of behavioural paradoxes cannot be explained by EUT, but these can be reconciled using their prospect theory, which analyses how people choose between ‘prospects’ – defi ned as sets of risky alternatives. Prospect theory can reconcile behavioural inconsistencies without abandoning rigorous analysis.
