Legal Definitions - prospect theory

Prospect theory is an economic theory that explains why people make certain decisions based on the potential outcomes and risks involved. It is also known as the incentive-to-commercialize theory, which justifies the granting of patent rights based on how efficient the patent system is at bringing together diverse resources such as commercial backing, manufacturing capacity, marketing know-how, and other skills that the inventor alone would be unable to handle.

For example, a company may invest in a new product idea because they believe it has the potential to be successful and generate profits. However, they may also be hesitant to invest too much money because there is a risk that the product may not sell well and they will lose money. Prospect theory helps to explain why companies may take calculated risks based on the potential outcomes and rewards.

Another example is an individual deciding whether to invest in the stock market. They may weigh the potential gains against the potential losses and make a decision based on their perceived level of risk. Prospect theory helps to explain why people may be more willing to take risks when the potential rewards are high.