Prospect Theory and Reference-Dependent Choice

Imagine you find a 20 wallet-sized portable charger that you’d just bought. You still came out even, but it doesn't feel even at all — the loss stings far more than the gain pleased you. This chapter explores why our financial decisions are shaped not by absolute final wealth, but by gains and losses relative to a personal reference point, and why we fear losses so much more than we love equivalent gains. We’ll unpack Prospect Theory, the most influential descriptive model of how people actually make choices under risk, and its key components: the value function, loss aversion, probability weighting, and framing.