From Bernoulli to Prospect Theory
Thinking, Fast and SlowThis 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

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

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

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

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

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