Enter Platform
← Glossary
Psychology

Prospect Theory

Kahneman and Tversky's 1979 model of decision-making under risk. Explains loss aversion (losses feel twice as painful as equivalent gains) and the probability weighting function (humans overweight small probabilities and underweight large ones). The foundational model for why trader behavior deviates systematically from rational-actor predictions.

See also
Psychology Loss Aversion The empirical finding that losses feel approximately twice as painful as equivalent gains feel pleasurable (Kahneman and Tversky, 1979). The engine behind the disposition effect. Structurally incompatible with memecoin trading, which requires cutting many losers fast to afford the rare large winner. → Psychology Lottery Effect Overweighting low-probability, high-magnitude outcomes because they are vivid and memorable. Formalized in Kahneman and Tversky's prospect theory as the probability weighting function. WIF, GOAT, and FARTCOIN are three names from a field of 11.5 million tokens that died in 2025 alone. → Psychology Disposition Effect The documented investor behavior of selling winners too early and holding losers too long. Named by Shefrin and Statman (1985), confirmed empirically by Odean (1998). The financial-markets fingerprint of loss aversion. Structurally incompatible with memecoin trading, which rewards letting rare winners run. →
← Back to Glossary Search all content →