According to prospect theory, how do individuals typically evaluate gains and losses?

Individuals typically evaluate gains and losses by assessing the potential value of losses and gains, as suggested by prospect theory. This theory, developed by Daniel Kahneman and Amos Tversky, posits that people do not evaluate outcomes merely on the total net result; instead, they weigh the significance of potential losses more heavily than equivalent gains. This leads to risk-averse behavior in the domain of gains and risk-seeking behavior in the domain of losses. For example, the pain associated with losing $100 is felt more intensely than the pleasure of gaining $100. As a result, this asymmetric evaluation influences decision-making processes, particularly under uncertainty, making individuals more sensitive to potential losses than to gains.

In contrast, considering the total outcome alone does not align with the nuanced approach reflected in prospect theory. Ignoring the emotional impact of losses is inaccurate, as the theory emphasizes the strong emotional responses associated with losses. Additionally, treating all financial decisions similarly overlooks the context-dependent nature of decision-making highlighted by prospect theory.