Journal of Economic Perspectives—Volume 27, Number 1—Winter 2013—Pages 173–196：Nicholas C. Barberis-Thirty Years of Prospect Theory in Economics: A Review and Assessment
In 1979, two Israeli psychologists, Daniel Kahneman and Amos Tversky, already
famous for their work on judgment heuristics, published a paper in the journal
Econometrica titled “Prospect Theory: An Analysis of Decision under Risk.”
The paper accomplished two things. It collected in one place a series of simple
but compelling demonstrations that, in laboratory settings, people systematically
violate the predictions of expected utility theory, economists’ workhorse model of
decision making under risk. It also presented a new model of risk attitudes called
“prospect theory,” which elegantly captured the experimental evidence on risk
taking, including the documented violations of expected utility.
More than 30 years later, prospect theory is still widely viewed as the best available
description of how people evaluate risk in experimental settings. Kahneman
and Tversky’s papers on prospect theory have been cited tens of thousands of times
and were decisive in awarding Kahneman the Nobel Prize in economic sciences in
2002. (Tversky would surely have shared the prize had he not passed away in 1996
at the age of 59.)
It is curious, then, that so many years after the publication of the 1979 paper,
there are relatively few well-known and broadly accepted applications of prospect
theory in economics. One might be tempted to conclude that, even if prospect theory
is an excellent description of behavior in experimental settings, it is less relevant
outside the laboratory. In my view, this lesson would be incorrect. Rather, the main
reason that it has taken so long to apply prospect theory in economics is that, in a
sense that I make precise in the next section, it is hard to know exactly how to apply
■ Nicholas C. Barberis is the Stephen and Camille Schramm Professor of Finance, Yale School
of Management, New Haven, Connecticut.
http://dx.doi.org/10.1257/jep.27.1.173. doi=10.1257/jep.27.1.173