Prospect Theory, and Heuristics and Biases

Choice anomalies and systematic biases in decision-making allow scientists to develop descriptive theories of cognition. They are litmus tests of decision-making. This chapter discusses a research programme by Daniel Kahneman and Amos Tversky based on the idea that people often make decisions using simple heuristics. These heuristics systematically bias people to make the same kind of mistakes. The end of the chapter discusses prospect theory, which describes how subjective judgements of probability and utility differ from their objective counterparts, resulting in decisions that deviate from the normative model.