A Prospect Dynamic Model of Decision-Making

In their 1979 article, Kahneman and Tversky introduced the world to the prospect theory of decision-making under risk as a critique of expected utility theory and its emphasis on final assets. Critics have noted that despite successful replications, its application outside the experimental arena is questionable. This article answers these critics by developing a formal model and theory of framing within prospect theory. Starting with an expected utility model, elements of risk, change and risk attitude are introduced in the context of the decision-maker’s belief sets and assumptions. The result is a finding that framing works because individual expectations shift when confidence in assumptions about the problem change. In conclusion, a number of analytic tools are applied to explore the dynamics of the model and the effect of changing a decision-maker’s view of the world and perception of a specific problem.