Prospect theory proposes that investors make decisions in two phases: editing and evaluation. In the editing phase, investors clarify choices using some combination of six possible steps: codification, combination, segregation, cancellation, simplification, and detection of dominance. In the cancellation step, investors eliminate (ignore) possible outcomes common to choices, so they might focus on low-probability, large outcomes. By focusing on the large, low-probability outcomes, they exhibit isolation (i.e., they isolate and make decisions based on certain outcomes). |
