Prospect theory is a behavioral economic theory developed by Daniel Kahneman and Amos Tversky in 1979. It describes how people make decisions involving risk and uncertainty, highlighting that individuals value potential losses and gains differently. Specifically, losses are perceived as more significant than equivalent gains, leading to risk-averse behavior when facing potential gains and risk-seeking behavior when facing potential losses. The theory introduces the concept of a "value function," which is concave for gains and convex for losses, indicating diminishing sensitivity. This means that the emotional impact of losing $100 feels stronger than the joy of gaining $100, influencing decision-making in various contexts, such as finance and insurance.