An attempt by Amos Tversky and Daniel Kahneman to construct a decision theory that describes the actual behavior of humans, rather than idealized rational decision-making.
An agent, in prospect theory:
is loss-averse, and so weighs losses (relative to some reference point) more strongly than gains
is risk-averse with respect to gains, but risk-seeking with respect to losses
uses probability weighting: small probabilities count more and larger probabilities count less than they would under expected utility.
Blog posts
Shane Legg on prospect theory and computational finance by Roko
Prospect Theory: A Framework for Understanding Cognitive Biases by Yvain
External links
Prospect theory at Psychology Wiki