The following text discusses behavioral economics.
Prospect theory, developed by Daniel Kahneman and Amos Tversky, challenges the traditional economic assumption that people rationally maximize utility. Their research showed that people evaluate gains and losses asymmetrically: losing 100 feels pleasant. This "loss aversion" helps explain otherwise irrational behavior, such as holding losing investments too long or refusing fair gambles. Prospect theory earned Kahneman the 2002 Nobel Prize and fundamentally reshaped how economists understand decision-making.
What key finding does prospect theory describe?
Gains and losses are weighed equally in decisions
People feel losses more intensely than equivalent gains
People always make perfectly rational economic decisions
Traditional economic models are always correct
Correct Answer: B
Choice B is the correct answer. The text states "losing 100 feels pleasant"—asymmetrical evaluation with losses felt more strongly.
- Evidence: Losses hurt approximately twice as much as gains please.
- Reasoning: This asymmetry is the core of loss aversion.
- Conclusion: People overweight losses relative to gains.
Choice A is incorrect because evaluation is explicitly asymmetric. Choice C is incorrect because the theory challenges rational utility maximization. Choice D is incorrect because prospect theory "challenges" traditional assumptions.