AN INTRODUCTION TO PROSPECT-THEORY

Prospect theory has emerged as a leading alternative to expected utility as a theory of decision under risk and has very recently begun to attract attention in the literature on international relations. The theory is best known for its hypothesis that individuals are risk-averse with respect to gains and risk-acceptant with respect to losses and for its emphasis on the importance of the actor's framing of decisions around a reference point. I begin this essay with a brief summary of expected utility theory and of some of the apparent empirical anomalies in the theory. I then show how prospect theory integrates these descriptive patterns into an alternative theory of risky choice. I discuss both the framing of decisions and the evaluation of prospects in terms of a value function and a probability weighting function.