Challenges to Prospect Theory: Three Classes of Boundary Conditions

Key Points

• Challenges to prospect theory arise from various boundary conditions, impacting concepts of risk preferences and decision-making.
• Key evidence shows that when tested across different scenarios, the utility theory framework may not hold universally.
• The review identifies three classes of boundary conditions affecting how choices are perceived and evaluated in prospect theory.
• Understanding these challenges may enable improved models of economic behavior and decision-making strategies.