Prospect Theory

Prospect theory is an important deviation from normative behavior because it describes a wide range of choices under uncertainty. Most choices people make are under varying degrees of uncertainty, since no one can ever have perfect knowledge of a situation. Prospect theory further demonstrates that humans are inherently poor with probabilities and that people can have intransitive preferences because they view each situation as a gain/loss rather than a change from state of wealth …

…The creation of these accounts is context dependent, and prior work has demonstrated that the source and timing of payments affects the allocation of resources into mental accounts. Doing something like a cost benefit analysis on whether or not to join the Army is one such example of mental accounting that I have used. In the early years of the ROTC program I kept a running tally of the pros and cons of the program.