Thirty Years of Prospect Theory in Economics: A Review and Assessment

34 Pages Posted: 18 Nov 2012  

Nicholas Barberis

Yale School of Management; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: November 2012

Abstract

Prospect theory, first described in a 1979 paper by Daniel Kahneman and Amos Tversky, is widely viewed as the best available description of how people evaluate risk in experimental settings. While the theory contains many remarkable insights, it has proven challenging to apply these insights in economic settings, and it is only recently that there has been real progress in doing so. In this paper, after first reviewing prospect theory and the difficulties inherent in applying it, I discuss some of this recent work. It is too early to declare this research effort an unqualified success. But the rapid progress of the last decade makes me optimistic that at least some of the insights of prospect theory will eventually find a permanent and significant place in mainstream economic analysis.

Keywords: prospect theory, loss aversion, probability weighting

JEL Classification: D1, D8

Suggested Citation

Barberis, Nicholas, Thirty Years of Prospect Theory in Economics: A Review and Assessment (November 2012). Available at SSRN: https://ssrn.com/abstract=2177288 or http://dx.doi.org/10.2139/ssrn.2177288

Nicholas Barberis (Contact Author)

Yale School of Management ( email )

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P.O. Box 208200
New Haven, CT 06520-8200
United States
203-436-0777 (Phone)

National Bureau of Economic Research (NBER)

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