Thirty Years of Prospect Theory in Economics: A Review and Assessment
Prospect theory, first described in a 1979 paper by Daniel Kahneman and Amos Tversky, is widely viewed as the best available description of how people evaluate risk in experimental settings. While the theory contains many remarkable insights, economists have found it challenging to apply these insights, and it is only recently that there has been real progress in doing so. In this paper, after first reviewing prospect theory and the difficulties inherent in applying it, I discuss some of this recent work. While it is too early to declare this research effort an unqualified success, the rapid progress of the last decade makes me optimistic that at least some of the insights of prospect theory will eventually find a permanent and significant place in mainstream economic analysis.
I am grateful to David Autor, Botond Koszegi, John List, Ted O'Donoghue, Matthew Rabin, Andrei Shleifer, and Timothy Taylor for extensive comments on an early draft. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.
Barberis, Nicholas C. 2013. "Thirty Years of Prospect Theory in Economics: A Review and Assessment." Journal of Economic Perspectives, 27(1): 173-96. DOI: 10.1257/jep.27.1.173