Unlike classical utility theory, which assumes people make decisions based on maximizing expected value, prospect theory posits that individuals evaluate potential outcomes in terms of gains and losses relative to a reference point. This implies that people are more sensitive to losses than equivalent gains (loss aversion). For example, the pain of losing $100 is often felt more intensely than the pleasure of gaining $100.

Choices are significantly influenced by the way options are presented or framed. Even when outcomes are objectively identical, subtle changes in wording, emphasis, or perspective can dramatically alter perceived attractiveness. This highlights the crucial role of context and presentation in shaping decisions.

People tend to overvalue things they already own, simply because they possess them. This ownership creates an emotional attachment and a reluctance to part with possessions, even if a rational analysis suggests otherwise.