Prospect Theory, also known as New Expectancy Theory, is a revolutionary approach in behavioural economics that redefines the way people assess risk and uncertainty when making decisions. Developed by Nobel Prize-winning economists Daniel Kahneman and Amos Tversky in the 1970s, this theory challenges traditional economic theory, which is based on rational actors.

At the heart of prospect theory is the realisation that people do not always make decisions logically or consistently, especially when it comes to risky or uncertain situations. Instead of expected utility maximisation, as proposed in classical economic theory, people tend to evaluate potential gains and losses differently. This asymmetry in the perception and evaluation of gains and losses is a central point of the theory.

One of the key aspects of prospect theory is loss aversion - the tendency to prioritise losses more than gains of equal value. This means that the pain of a loss is often felt more intensely than the pleasure of an equivalent gain. This finding has far-reaching implications for the understanding of human behaviour in various areas, from financial market analysis to psychological research.

Another important element of prospect theory is the idea of reference points. Decisions are often made in relation to a certain reference point, such as the status quo or a certain expected value. Changes in relation to this reference point are weighted more heavily than the absolute value. This leads to the phenomenon that people are often risk-averse in relation to gains, while they become more risk-averse when faced with the threat of losses.

Prospect theory has also introduced the concept of framing. The way in which an option or scenario is presented can strongly influence people's decisions. For example, the same decision can be made differently depending on whether it is presented in the context of a potential gain or a potential loss.

In summary, prospect theory is a milestone in behavioural economics that provides a deeper understanding of how people make decisions under uncertainty. It has influenced not only economics, but also fields such as psychology, marketing and political science. By emphasising the psychological components of the decision-making process, it broadens our view of human behaviour in economic and social contexts.