Prospect Theory

Amos Tversky and Daniel Kahneman developed the prospect theory that explains the way people deal with losses and gains.

They found that people feel a loss of x value has more negative feeling that a gain of x value has positive feeling. In other words, people seem to risk more when they sense themselves losing than when they feel like they're winning. This theory is evident in the casino business. When people are at a casino, they spend more when they are losing, because they are trying to make up for what they've lost. 

Tversky and Kahneman also found that they way options are framed affects how persuasive they can be. By labeling treatment options as the possible gains that could result, people will go with the option that guarantees people will survive, even though both options will result in the same number of survivors. When the options are framed as possible losses, people tend to choose the option that seems riskier.

• GAINS
• A: Will save 200 of 600 lives.
• B: 33.33% chance of saving all 600 lives, 66.67% of saving none.

•  LOSSES
• C: 400 of 600 people will die.
• D: 33.33% chance none will die, 66.67% chance all 600 will die.

Byrnes, Ralph. "Prospect Theory." Economics Interactive. Web. 31 Oct 2010. <http://www.unc.edu/depts/econ/byrns_web/Economicae/Figures/Prospect.htm>.

 Tversky, Amos and Daniel Kahneman. "The Framing of Decisions and the Psychology of Choice." Science. 211.4481 (1981): 453-458. Print.