PROSPECT THEORY

States that individual values with respect to gains and losses are in comparison to a reference point. Derived from psychology helps explain some anomalies including differences with respect to willingness to pay and willingness to accept. This contrasts with the economic assumption that individuals maximize utility. What matters is the point from which gains and losses are measured. It also suggests that values for negative deviations from the reference point will be greater than values place on positive deviations. Gains are valued less than losses. Third, the manner in which the gains and losses are to be secured matters a great deal.