Prospect Theory is again something slightly technical, but it is a key element of Behavioral Economics. So, let’s start by defining what behavioral economics is.

Behavioral Economics studies people’s psychological, emotional, cognitive, and cultural aspects to analyze how they make economic decisions. It does not believe that humans are perfectly reasonable animals who will make every decision rationally.

Behavioral Economics shows that humans are more complex than that and that they are affected by elements such as the cognitive biases we have talked about before. Behavioral economics is of course linked to Behavioral Psychology, about which we also have talked in the previous pages.

Okay, so what is Prospect Theory? For a definition that is simple enough, I will not use the Wikipedia definition this time. Instead, I take the definition by Morris Altman in “Behavioral Economics For Dummies Cheat Sheet”:

“Prospect theory, a theory about how people make choices between different options or prospects, is designed to better describe, explain, and predict the choices that the typical person makes, especially in a world of uncertainty.”

This theory impacts Service Design as it shows that humans have a general tendency to prefer certainty and avoid losses (which is related to the famous cognitive bias called Loss Aversion).

This article is part of the book "A Tiny History of Service Design, " a tiny two-hour read that goes through the historical events that created what Service Design is today.