From Bernoulli to Prospect Theory

Thinking, Fast and Slow

This flow follows the replacement of wealth-based utility with reference-dependent gains, losses, and probability weights.

increasing

Bearing strength in each event

decreasing

Bernoulli's Utility Bernoulli's Utility from "Thinking, Fast and Slow". Wealth and Risk Diminishing Utility Daniel Bernoulli explains risk aversion through the declining marginal value of wealth.

Bernoulli's Utility from "Thinking, Fast and Slow". Wealth and Risk Diminishing Utility Daniel Bernoulli explains risk aversion through the declining marginal value of wealth.

Wealth and Risk Diminishing Utility Daniel Bernoulli explains risk aversion through the declining marginal value of wealth. Long Authority The model remains influential for centuries despite psychological omissions.

Reference Point Discovery Reference Point Discovery from "Thinking, Fast and Slow". Jack and Jill Same Wealth Two people with identical present wealth feel opposite emotions because their histories differ.

Reference Point Discovery from "Thinking, Fast and Slow". Jack and Jill Same Wealth Two people with identical present wealth feel opposite emotions because their histories differ.

Jack and Jill Same Wealth Two people with identical present wealth feel opposite emotions because their histories differ. Relative Evaluation Recent change and reference point become central to value.

Gains and Losses Gains and Losses from "Thinking, Fast and Slow". Beyond Final States New Carriers of Value Prospect theory evaluates changes from a reference state rather than total wealth.

Gains and Losses from "Thinking, Fast and Slow". Beyond Final States New Carriers of Value Prospect theory evaluates changes from a reference state rather than total wealth.

Beyond Final States New Carriers of Value Prospect theory evaluates changes from a reference state rather than total wealth. Emotional Asymmetry Losses hurt more than equivalent gains please.

Risk Reversal Risk Reversal from "Thinking, Fast and Slow". Good and Bad Gambles Gain Domain People usually prefer a sure gain to a favorable gamble.

Good and Bad Gambles Gain Domain People usually prefer a sure gain to a favorable gamble. Loss Domain When every option is bad, they often gamble to escape a sure loss.

Prospect Theory Published Prospect Theory Published from "Thinking, Fast and Slow". A Descriptive Theory Against Rational Choice The theory explains systematic violations of expected utility axioms.

Prospect Theory Published from "Thinking, Fast and Slow". A Descriptive Theory Against Rational Choice The theory explains systematic violations of expected utility axioms.

A Descriptive Theory Against Rational Choice The theory explains systematic violations of expected utility axioms. Wider Consequences Reference points, diminishing sensitivity, and loss aversion reshape economics.

In the historical opening of Part 4

During the early prospect-theory discussion

After the reference-point puzzle

Middle of the prospect-theory chapter

1979