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Thirty Years of Prospect Theory in Economics: A Review and Assessment

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  • Nicholas C. Barberis

Abstract

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.

Suggested Citation

  • Nicholas C. Barberis, 2012. "Thirty Years of Prospect Theory in Economics: A Review and Assessment," NBER Working Papers 18621, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:18621
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    2. Plante, Charles & Lassoued, Rim & Phillips, Peter W.B., 2017. "The Social Determinants of Cognitive Bias: The Effects of Low Capability on Decision Making in a Framing Experiment," SocArXiv u62cx, Center for Open Science.
    3. Cheng, Xiu & Long, Ruyin & Chen, Hong, 2020. "A policy utility dislocation model based on prospect theory: A case study of promoting policies with low-carbon lifestyle," Energy Policy, Elsevier, vol. 137(C).
    4. Maya Shaton, 2017. "The Display of Information and Household Investment Behavior," Finance and Economics Discussion Series 2017-043, Board of Governors of the Federal Reserve System (U.S.).
    5. Yan Bao & Fangyu Chang & Jinkai Shi & Pengcheng Yin & Weige Zhang & David Wenzhong Gao, 2022. "An Approach for Pricing of Charging Service Fees in an Electric Vehicle Public Charging Station Based on Prospect Theory," Energies, MDPI, vol. 15(14), pages 1-20, July.
    6. Stuart G McIntyre, 2017. "Personal indebtedness, community characteristics and theft crimes," Urban Studies, Urban Studies Journal Limited, vol. 54(10), pages 2395-2419, August.
    7. Shleifer, Andrei, 2012. "Psychologists at the Gate: Review of Daniel Kahneman’s Thinking, Fast and Slow," Scholarly Articles 10735580, Harvard University Department of Economics.
    8. Trond G. Husby & Elco E. Koks, 2017. "Household migration in disaster impact analysis: incorporating behavioural responses to risk," Natural Hazards: Journal of the International Society for the Prevention and Mitigation of Natural Hazards, Springer;International Society for the Prevention and Mitigation of Natural Hazards, vol. 87(1), pages 287-305, May.
    9. Joo, M. Hashemi & Parhizgari, A.M., 2021. "A behavioral explanation of credit ratings and leverage adjustments," Journal of Behavioral and Experimental Finance, Elsevier, vol. 29(C).
    10. Donato Masciandaro & Davide Romelli, 2018. "To Be or not to Be a Euro Country? The Behavioural Political Economics of Currency Unions," BAFFI CAREFIN Working Papers 1883, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.

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    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles

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