According to Prospect Theory, decisions are primarily made based on what factor?

Prospect Theory, developed by Daniel Kahneman and Amos Tversky, fundamentally reshapes our understanding of decision-making under risk and uncertainty. It posits that individuals evaluate potential outcomes not solely based on the final results, but significantly on the perceived value of gains and losses relative to a reference point. This means that people are generally loss-averse; they tend to feel the pain of losses more intensely than the pleasure derived from equivalent gains.

In practical terms, when faced with choices, individuals will weigh the potential loss of something they already have more heavily than the chance of gaining something new. This valuation system often leads to irrational decision-making, as individuals may opt to avoid losses rather than pursue gains, even if the probabilities suggest that pursuing gains would result in a better expected outcome.

The incorrect choices reflect alternative factors that, while they may influence decision-making, do not capture the core principle of Prospect Theory. The final outcome, risk amount, and popularity of a choice may play roles in decision-making processes, but they do not account for the distinctive ways people interpret gains and losses as framed in Prospect Theory. The emphasis on how decisions are influenced by perceived changes in wealth—rather than final states or external influences—is key to understanding this theory's