Prospect theory in the wild: Evidence from the field

Abstract

The workhorses of economic analysis are simple formal models that can explain naturally occurring phenomena. Reflecting this taste, economists often say they will incorporate more psychological ideas into economics if those ideas can parsimoniously account for field data better than standard theories do. Taking this statement seriously, this article describes 10 regularities in naturally occurring data that are anomalies for expected utility theory but can all be explained by three simple elements of prospect theory: loss aversion, reflection effects, and nonlinear weighting of probability; moreover, the assumption is made that people isolate decisions (or edit them) from others they might be grouped with (Read, Loewenstein, and Rabin 1999; cf. Thaler, 1999). I hope to show how much success has already been had applying prospect theory to field data and to inspire economists and psychologists to spend more time in the wild.