This chapter reviews developments in the theory of decision making under risk and uncertainty, focusing on models that, over the last 40 years, dominated the theoretical discussions. It also surveys some implications of the departures from the “linearity in the probabilities” aspect of...

The phenomena of ambiguity and ambiguity aversion , introduced in Daniel Ellsberg’s seminal 1961 article, are ubiquitous in the real world and violate both the key rationality axioms and classic models of choice under uncertainty. In particular, they violate the hypothesis that individuals’...

Prospect theory (PT) is the dominant descriptive theory of decision making under risk today. For the modeling of choices, PT relies on a psychologically founded separation of risk attitudes into attitudes towards outcomes, captured in a value function; and attitudes towards probabilities,...