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

35 Pages Posted: 15 Dec 2012 Last revised: 20 May 2023

See all articles by Nicholas Barberis

Nicholas Barberis

National Bureau of Economic Research (NBER); Yale School of Management

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Date Written: December 2012

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

Barberis, Nicholas and Barberis, Nicholas, Thirty Years of Prospect Theory in Economics: A Review and Assessment (December 2012). NBER Working Paper No. w18621, Available at SSRN: https://ssrn.com/abstract=2189759

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