Prospect Theory
Prospect Theory is a behavioral economic theory developed by Daniel Kahneman and Amos Tversky that describes how people make decisions under risk and uncertainty. It challenges traditional expected utility theory by showing that individuals evaluate potential losses and gains using heuristics and biases, such as loss aversion and probability weighting. The theory is foundational in understanding real-world decision-making, particularly in finance, marketing, and psychology.
Developers should learn Prospect Theory to enhance user experience design, as it helps predict how users perceive risks and rewards in software interfaces, such as in e-commerce or gamification. It is also valuable in data science and AI for modeling human behavior in predictive analytics or algorithmic trading systems. Understanding this concept can improve decision-making in product development and risk assessment in tech projects.