Prospect Theory is an attempt by Amos Tversky and Daniel Kahneman to construct a decision theory that describes the actual behavior of humans, rather than idealized rational decision-making.
An agent, in prospect theory:
is loss-averse, and so weighs losses (relative to some reference point) more strongly than gains
is risk-averse with respect to gains, but risk-seeking with respect to losses
uses probability weighting: small probabilities count more and larger probabilities count less than they would under expected utility.
Blog posts
External links
Prospect theory at Psychology Wiki