Prospect Theory (Essay Sample)

Prospect Theory.
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Prospect Theory.
Prospect theory is a theory of how people make decisions on risk-taking, trade-offs, and uncertainty and how they behave when uncertain. The theory states that the prospect theory guides a person's decision-making, also called the prospect theory of decision-making. Correlation between prospect theory and financial decision-making suggests that losses, relative to gains, are more likely to occur when a person understands losses better than gains. This tendency is also known as loss aversion or loss-aversion bias. This paper explores prospect theory and financial decision-making within a risk management framework.
Prospect theory is better understood by this example; imagine that you are choosing between two investments. The first investment is guaranteed to return 10% per year. The second investment is guaranteed to return 5% per year but has a 20% chance of returning 20% per year. Which investment would you choose? Most people would probably choose the second investment because it has a higher expected return than the first investment but with a greater risk.
The second investment has a higher expected return than the first, but it also has a greater risk. This is an example of a trade-off: the first investment has a certain, predictable return, and the second has a greater return but greater risk. Prospect theory describes how people make decisions when they have a choice between two or more options and when they have to decide between two or more options. It describes how people weigh the benefits and risks of each option and the decisions they make when uncertain.
The theory of prospect theory was first proposed by Nobel Prize winner Daniel Kahneman and his colleague