Abstract
This chapter highlights the behavioral and neuroscience work on the prospect theory and the neuroscience of behavioral decision-making. Several applications of prospect theory from neuroeconomics to decision analysis to behavioral finance require individual assessment of value and weighting functions. In order to measure the shape of the value and weighting functions exhibited by participants in the laboratory, one must first discuss how these functions can be formally modeled. The field of neuroeconomics is providing a rapidly increasing amount of data regarding the phenomena that lie at the heart of prospect theory, such as framing effects and loss aversion. It is clear that the demonstrations of neural correlates of several of the fundamental behavioral phenomena underlying prospect theory (loss aversion, framing effects, and probability weighting distortions) provide strong evidence to even the most entrenched rational choice theorists that these anomalies are real. The data have also started to provide more direct evidence regarding specific claims of the theory.
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