Prospect Theory
Daniel Kahneman & Amos Tversky, Econometrica, 1979 (Nobel 2002)
Losses are felt roughly twice as hard as equivalent gains — so decisions are asymmetric around a reference point.
In plain language
Prospect Theory replaced rational-choice theory in economics. Kahneman and Tversky showed that humans don't evaluate outcomes by their absolute value. They evaluate them by the gain or loss relative to a reference point — and losses hurt roughly 2× more than equivalent gains feel good.
The theory explains why people hold losing stocks too long (loss aversion), why frames matter ('90% survival' vs '10% mortality' trigger different decisions even though the numbers are identical), and why decoy pricing works (context shifts the reference point).
Kahneman received the Nobel Prize in Economics in 2002, the only non-economist to receive it. Amos Tversky died before the prize could be awarded; Kahneman has said it was Tversky's work as much as his.
How Maxim applies it
- L1.1 AI Governance is built on Prospect Theory. Every recommendation weights downside risk explicitly — failed audit, wrong framework, compliance drift, brand voice slip — because the operator feels those losses ~2× harder than the corresponding gains. Generic LLMs lead with upside; Maxim leads with the loss-framed audit trail.
- Pricing-page copy Maxim generates uses loss framing deliberately. '$19.99/month. One prevented compliance incident pays for three years of Solo' is a Prospect-Theory-tuned pitch, and Maxim tells you so — the framework citation appears in the skill's SKILL.md so you know why it's framed that way.
- The confidence rubric is itself loss-averse. The default tag is not 🟢 HIGH — it has to be earned. The rubric's Gap line names specifically what would tip the tag down, so the reader knows where the loss risk sits.
What generic LLMs get wrong
Generic LLMs frame outputs around upside ('you could save 40% of your time') without pairing it with the loss frame ('you avoid the 2-hour review cycle that catches one error in five'). Prospect Theory says the loss frame converts better for risk-averse buyers — which is most operators making a governance purchase.