Risky Behavior and the Casinos of the Human Mind
Daniel Kahneman won the 2002 Nobel Memorial Prize in Economics for his work on Prospect Theory. Prospect Theory describes the human tendency to choose between alternatives that involve various levels of risk. What Prospect Theory tells us is that people tend to make real-life choices based on perceived losses or gains rather than the final outcome. In short, Prospect Theory maintains that humans hate to lose more than they love to win, and therefore make bets where losing is more important than winning. In addition, once we make a decision not to lose, regardless of the risk, we become anchored in that decision, making it difficult to change our minds, which clouds the line between rational and irrational decision making. This tendency is particularly important when we bet on risk that involves potential harm to life, health, and property.