Friday Article Pick for CFA Candidates and CFA Charterholders: Daniel Kahneman, Amos Tversky (Econometrica, 1979) – Prospect Theory: An Analysis of Decision under Risk

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Following on the article pick from 20 May “Judgment under Uncertainty: Heuristics and Biases (1974)”, “Prospect Theory: An Analysis of Decision under Risk” is the second groundbreaking and most famous academic paper of Kahneman and Tversky. This text is in fact among the most cited academic papers of all time laying core foundations of behavioral economics, having integrated insights from cognitive psychology into economic science.
Generally, behavioral economics deal with behavior of economic agents, individual investors and corporate executives who behave in reality differently compared with the standard mainstream economic theory. Economic agents are indeed human beings with strong emotions and have to make decisions under risk and uncertain conditions.

Daniel Kahneman was awarded Nobel Memorial Prize in Economic Sciences in 2002 (shared with Vernon Smith – experimental economics), first Nobel prize for a psychologist "for having integrated insights from psychological research into economic science, especially concerning human judgment and decision-making under uncertainty". Amos Tversky died prematurely in 1996 unfortunately.

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