Subjective Problems with Prospect Theory

Subjective problems associated with Prospect Theory include reliance on subjective data and perceptions, difficulty in accounting for factors related to risk and uncertainty, and an overriding emphasis on individual welfare. Prospect Theory is based on the assumption that individuals value gains and losses differently and will take different actions to maximize their own utility. Because this is a subjective concept, individual preferences may vary significantly and render the theory's predictions less accurate. Furthermore, the theory does not adequately account for factors related to risk and uncertainty, such as volatility and the potential for significant losses, which can influence decision-making and lead to different outcomes than the theory would suggest. Finally, the theory places an overriding emphasis on utility maximization which disregards other factors, such as the societal impact of a decision, that should be taken into consideration.