Prospect Theory

Prospect theory is the formal architecture of human decision-making under risk, documented through decades of experiments showing that people violate the axioms of expected utility theory in systematic, predictable, mathematically tractable ways. The theory replaces the assumption of absolute-value evaluation with reference-point-dependent evaluation; replaces linear probability weighting with an S-shaped weighting function that overweights small probabilities and underweights large ones; and replaces symmetric utility with a value function that is concave for gains, convex for losses, and steeper for losses than for gains. Each component has direct implications for how people process the AI transition: the certainty of losses is overweighted relative to the probability of gains, diminishing sensitivity produces habituation to both the excitement and the dread, and catastrophic AI scenarios receive attention wildly disproportionate to their probability because small probabilities are inflated in the weighting function.