Prospect theory is a particular subset of behavioral economics, both heavily influenced by the collaboration of Daniel Kahneman and Amos Tversky. This 14 year collaboration produced ground breaking work in cognition theory and resulted in a Nobel Prize in Behavioral Economics. Their work has been cited in many fields of academic study, from architecture to artificial intelligence. In 2011, Kahneman published Thinking Fast and Slow, which is a great summary and introduction to their work in this field.
Prospect Theory, at heart, is an investigation as to how humans make the decisions that they do. In this regard it is very closely related to the traditional field of psychology, but where traditional psychology explores the formative process by which individuals develop motivational factors, prospect theory explores the mechanics by which information is observed and processed. Traditional Psychology explores why people respond to information the way that they do; Prospect Theory explores how they perceive information in order to respond. Both are necessary for a complete picture of the mental process.
Prospect Theory has offered several notable revelations about human beings, most notable is that every single person, regardless of socioeconomic status, gender, race, nationality, age, sexuality, I.Q., religion, etc..., everyone makes the same mistakes in the same ways. This is the second great Truth of developmental psychology: people are all the same. As psychologists the world over set themselves on fire, let me qualify that. People are not exact replicas of each other, but are the same in some interesting ways. In light of the first Truth, that everyone is different, this second Truth becomes the foundation for the First Law of Human Dynamics: because people are so very different, anything that is true about each us is a significant fact about the nature of all of us, or Ringdahl's Theory of Reflexive Humanity. As such things go, we can flip it around and see that anything that is true about all of us is a significant fact about the nature of each of us.
An additional perspective that prospect theory brings to the psychological model is application of the principles of the attention economy. The economic principles that Kahneman and Tversky applied to their examination of the human cognitive function were the primary justification behind Kahneman receiving the Nobel Prize in Economics for the work they had done despite, as Kahneman put it, not having ever taken an economics class between the two of them (Kahneman, 2011). We are going to apply some of those principles in our exploration of the developmental process.
Among the results of their findings was the discovery that the human brain has a finite amount of brain-power available at any particular moment, and that this amount is generally the same for any individual, but is not necessarily all available to the individual at their youngest ages. The ways that humans use this finite amount of brain power operates according to a few economic principles that represent the way we subconsciously assign certain amounts of brain-power to different tasks at any given moment.
Video game culture has provided a decent illustration of how this process works in the different types of character improvement structures employed in a few genres. As brief description:
As a video game character goes through the narrative of the game, facing and overcoming challenges, the character is being rewarded in some sort of currency. This currency is embodied many different ways: money to by Character Tool Upgrades, Gems to invest in Ability Options, or the most ubiquitous Experience Points. These different currencies serve to enable the character to gradually improve their engagement options, efficiency, and general well being. The progress in the investment path of this currency is represented by levels, and within the most sophisticated of these games, multiple overlapping and interweaving skill trees.
Our development of our psyche, or humanness, can be understood as an investment of a similar sort of currency in a slightly more complicated series of interconnected skills trees. Recent findings in the neurobiological field have put the brain operational parameters at about 30 W and 100 Hz. It is easiest to talk about $100 that you can spend in about 30 ways. Every use of cognitive effort requires investment of these $100 dollars. You open up new options every time you commit something to "muscle memory", where you can access any particular utility without excessive cognitive strain. By freeing up all those dollars you had to be using to previously access that utility, you can now devote them to a different utility, and also have a new combination of previously gained utilities.
Things get a bit more complicated here, though. The human brain does not exist at this hypothetical state of maximum capacity until it is around 25. Before the completion of the character's development, it goes through a series of development expansions that correspond with increasing availability of brain hardware and cross-indexing skill tree options, if you will. A baby might have about $40 to spend, and maybe 14 ways to spend it, so it spends a lot of its money on things like "Hey, I am a Thing" and "This thing I am on is a Thing". Hypothetical Baby then starts to invest heavily in the "Hey, I can Move my Thing", and "This Other thing doesn't Move". Still keeping a fair amount of money in the emerging "Look what I can make my Thing do" market, Hypo-Baby starts processing this other Other thing (usually a family member, Mom when available) which had always Moved when Hypo-Baby Moved, but then HyBay really opens up on the "This is a Thing That is Me, But also Does not Always Move when I Move" concept. And so on.
As HyBay locks certain concepto-skills into Free Access Utilities, from "I can move my hand with Exactly This Much Precision" to "That is My Mom, and She is Not Me, But She is so close to Me that I can safely consider Her as Me in any Meaningful Situation", HyBay can then access certain Free Access Utility Combinations. Consider the development of fine motor control after gross motor control as a 2nd level investment in the "I can move my hand with Exactly This Much Precision" Utility, moving that Utility to the next Free Access Level.
Part of the difficulty in developmental theories is that people themselves are active agents in their own development, and we don't develop the full ability to make good, reliable, informed decisions until fairly late in the developmental process. Some have described this as starting the engine of a vehicle before there is a skilled driver behind the wheel, though a more precise illustration might be putting an unskilled driver behind a wheel and letting the decisions they make define the rest of the creation of the vehicle. Cognition theory has identified some common ways we mess up making decisions. In other words, since it has been reasonably demonstrated that there is a common wrench in our gears, we should probably consider the way that wrench bounces around during the construction of the engine.
This continues through HyBay's Life as life gets increasingly more complicated, as do the different Utility combinations that HyBay has to try and get locked into Free Access Utility. HyBay gradually gets access to more parts of the brain, getting upgrade in the cash and usage departments. Through high school HyBay has to deal with increasingly complicated ways that This Thing HyBay was on that was Definitely Not HyBay existed and could be interacted with by Those Like HyBay.
New prefrontal cortex means more cogno-cash money in the bank, so naturally we should expect more things that HyBay desperately needs to get sorted out quickly. Welcome, Puberty. Time to start investing in those "These very Specific Things are Not Me" concept combination Utilities as they start to meet in a lot of very interesting places. We also complicate this by adding a lot of really vital combination possibilities in the "These Things are A Lot Like Me", and "We are on the Same Team", and "I am Really Not Like Absolutely Anyone" areas. Enjoy sorting all that out with your measly $70 dollar allowance. We'll throw in a growth spurt, just to keep you on your toes. And so on throughout the developmental process.
The goal of the process is what we are going to call self actualization. By that we simply mean the internalization of both your Strangeness and your Relatedness, a culmination of your individuation and your integration, your diversification and your inclusion, your differentiation and your identification.