Prospect Theory (1979 paper)

"Prospect Theory: An Analysis of Decision Under Risk" appeared in Econometrica in 1979 and became one of the most cited papers in the social sciences. Against the expected-utility framework that assumed rational agents evaluate outcomes by multiplying probability by utility, Kahneman and Tversky demonstrated through systematic experiments that actual human decision-making deviates from this framework in specific, predictable ways. People evaluate outcomes relative to reference points rather than in absolute terms. They feel losses roughly twice as intensely as equivalent gains. They overweight small probabilities and underweight moderate and high probabilities. They exhibit risk-aversion for gains and risk-seeking for losses. The paper provided the mathematical formalization — the value function and the probability weighting function — that made these findings tractable in ways that had eluded earlier descriptive decision theory.