◈ GLOSSARY · MONEY MINDSET
Prospect Theory.
A definition, in plain English — with the books that teach it.
Reviewed by ClearValue Editorial Team · Jun 27, 2026
◈ DEFINITION
What it means
Definition
The Kahneman-Tversky model of how people actually make decisions under risk — and the academic backbone of behavioral finance. Two big findings: losses hurt about twice as much as equivalent gains feel good, and people evaluate outcomes relative to a reference point (usually their starting position), not absolute wealth. The honest caveat: it describes what people do, not what they should do; the lesson is to notice when your reference point is driving the call.
◈ IN PRACTICE
Example
Offered a coin flip to win $150 or lose $100, most people decline — even though the expected value is positive. The pain of the potential $100 loss outweighs the appeal of the $150 win. That's prospect theory in one bet.
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