Kahneman and Tversky's greatest contribution was prospect theory, which replaced the classical model of rational decision-making. Traditional theory said people evaluate outcomes based on final wealth. Prospect theory showed people evaluate changes from a reference point.

This subtle shift explained enormous puzzles. People gamble with losses — taking bigger risks to avoid confirming a loss — while playing it safe with gains. The same person who buys insurance against small losses will also buy lottery tickets with terrible odds.

Prospect theory predicted behaviors that rational choice theory declared impossible. It became the foundation of behavioral economics and changed how economists, policymakers, and businesses understand human decision-making.