<p>Challenges to Prospect Theory: Three Classes of Boundary Conditions</p>

The experimental findings that motivated prospect theory reveal systematic deviations from the predictions of expected utility theory, which can be elegantly accounted for by assuming several key behavioral tendencies. However, the conditions under which these tendencies accurately capture behavior exhibit clear and important boundaries. In some cases, behavior outside these boundaries reflects biases that run in the opposite direction. This chapter reviews research that identifies, clarifies, and explains these boundary conditions. The discussion highlights three primary sources of such boundaries: the description-experience gap, presentation effects, and the impact of differing payoff distributions. The chapter also examines three classes of explanations for these phenomena: situation-specific parameters, additional behavioral tendencies not encompassed by prospect theory, and the "doubting decision maker" account. Identifying and understanding these boundary conditions-and the mechanisms that produce them-constitute a central challenge for researchers employing prospect theory.