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. This asymmetry in valuing gains and losses has profound implications for understanding risk aversion and decision-making under uncertainty.

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. For instance, people are more likely to choose a medical treatment with a "70% survival rate" compared to one framed as having a "30% mortality rate," even though both convey the same information.

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. This effect helps explain phenomena like the difficulty of selling personal belongings for a fair price or the tendency to hold onto losing investments longer than advisable.