The theory earned Kahneman the 2002 Nobel Prize in Economics and reshaped pricing, negotiation, and product design.
Glossary
Prospect Theory
Losses hurt more than gains please.
In short
A behavioral-economics theory developed by Daniel Kahneman and Amos Tversky that describes how people actually evaluate gains and losses under risk — as distinct from how classical economics assumes they should. Prospect theory's central findings are that losses loom roughly twice as large as equivalent gains (loss aversion), that people are risk-averse over gains but risk-seeking over losses, and that probabilities are systematically distorted at the extremes.
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Related terms.
Term
Pre-Mortem Analysis
A decision-making technique developed by psychologist Gary Klein in which a team imagines that a project or decision has already failed, then works backward to identify the most likely causes.
Definition TermPrompt Framing Effect
The phenomenon whereby the phrasing, structure, and implicit assumptions embedded in a question systematically bias the responses generated by large language models.
Definition TermRACI Framework
A responsibility-assignment matrix that classifies every person involved in a task or decision into one of four roles: Responsible (does the work), Accountable (owns the outcome — exactly one person per task), Consulted (provides input before the work is done), and Informed (notified after the fact).
Definition TermRAPID Framework
A decision-rights framework developed by Bain & Company that assigns five roles to every significant decision: Recommend (drives the proposal), Agree (must concur for the decision to proceed), Perform (executes once decided), Input (provides expertise and context), and Decide (has final authority).
Definition TermReasoning Framework
A structured approach to analysis that determines how an agent processes information and reaches conclusions.
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