n 1979, two Israeli psychologists, Daniel Kahneman and Amos Tversky, already
famous for their work on judgment heuristics, published a paper in the journal
Econometrica titled “Prospect Theory: An Analysis of Decision under Risk.”
The paper accomplished two things. It collected in one place a series of simple
but compelling demonstrations that, in laboratory settings, people systematically
violate the predictions of expected utility theory, economists’ workhorse model of
decision making under risk. It also presented a new model of risk attitudes called
“prospect theory,” which elegantly captured the experimental evidence on risk
taking, including the documented violations of expected utility.
More than 30 years later, prospect theory is still widely viewed as the best avail-
able description of how people evaluate risk in experimental settings. Kahneman
and Tversky’s papers on p