Prospect Theory


Health Economics

  • An approach to decisions under uncertainty that provides an alternative account for the phenomenon of risk aversion to that of expected utility theory and that helps to explain why framing effects exist. Prospect theory differs from expected utility theory in assigning 'decision weights' rather than probabilities to outcomes and in assuming that decision weights tend to overweight small probabilities and underweight moderate and high probabilities. It also differs from expected utility theory in that it replaces the notion of utility with 'value', defined in terms of deviations from a reference point. The value function has a different shape for gains and losses. For losses it is convex and steep, for gains it is concave and flatter. Although hardly in current use in health economics it is likely to make an appearance in the future, initially, perhaps, in topics that use experimental methods like health status measurement.