Utility Theory, Prospect Theory

Utility theory suggests when individuals make decisions they look at all rational facts and choose the option with best overall outcome.

But then why do we make irrational decisions, it's because of Prospect theory which suggests because we fear losses more than we value gain we tend to make irrational decisions.

• We fear to loose something due to Diminishing sensitivity principle which suggests the value we precieve of something maybe different from it's actual worth.