Prospects and regrets
DOI link for Prospects and regrets
Prospects and regrets book
This chapter explores some behavioural paradoxes that led to rethinking of standard approaches in the evolution of D. Kahneman and Amos Tversky’s prospect theory. Prospect theory is a framework which captures how people choose between different risky “prospects” – defined as sets of risky alternatives. Prospect theory can reconcile behavioural inconsistencies without abandoning rigorous analysis. A fundamental aspect of Kahneman and Tversky’s analysis of prospect theory is their critique of expected utility theory. Kahneman and Tversky provide a critique of L. J. Savage’s approach to analysing decisions between uncertain outcomes – the set of risky alternatives that Kahneman and Tversky call “prospects”. G. Loomes and R. Sugden formulate regret theory as a “simpler”, “more intuitive” alternative to Kahneman and Tversky’s prospect theory. In regret theory, there is one consequence for each state of the world whereas in prospect theory a number of different actions may correspond with each prospect.