This paper reviews and assesses prospect theory, first described in a 1979 paper by Daniel Kahneman and Amos Tversky, which is widely viewed as the best available description of how people evaluate risk in experimental settings. While the theory contains many remarkable insights, economists have found it challenging to apply these insights, and it is only recently that there has been real progress in doing so. The paper discusses recent work in behavioral economics that incorporates prospect theory into traditional economic models and tests the predictions of these new theories. While it is too early to declare this research effort an unqualified success, the rapid progress of the last decade makes me optimistic that at least some of the insights of prospect theory will eventually find a permanent and significant place in mainstream economic analysis. Prospect theory is a model of decision-making under risk that captures the idea that people derive utility from gains and losses measured relative to a reference point. It includes four key elements: reference dependence, loss aversion, diminishing sensitivity, and probability weighting. The value function in prospect theory is concave in the region of gains but convex in the region of losses, and the weighting function leads individuals to overweight the tails of any distribution. The paper discusses the challenges in applying prospect theory in economics, including the difficulty of defining gains and losses in different contexts. It also reviews the applications of prospect theory in finance, insurance, and other areas of economics. In finance, prospect theory has been used to explain the cross-section of average returns, the aggregate stock market, and the disposition effect. In insurance, it has been used to explain insurance decisions and the annuitization puzzle. In other areas, it has been used to understand the endowment effect, consumption-savings decisions, industrial organization, and labor supply. The paper concludes that while prospect theory has been applied in various areas of economics, there are still challenges in applying it effectively. However, the rapid progress of the last decade suggests that prospect theory will continue to play an important role in economic analysis.This paper reviews and assesses prospect theory, first described in a 1979 paper by Daniel Kahneman and Amos Tversky, which is widely viewed as the best available description of how people evaluate risk in experimental settings. While the theory contains many remarkable insights, economists have found it challenging to apply these insights, and it is only recently that there has been real progress in doing so. The paper discusses recent work in behavioral economics that incorporates prospect theory into traditional economic models and tests the predictions of these new theories. While it is too early to declare this research effort an unqualified success, the rapid progress of the last decade makes me optimistic that at least some of the insights of prospect theory will eventually find a permanent and significant place in mainstream economic analysis. Prospect theory is a model of decision-making under risk that captures the idea that people derive utility from gains and losses measured relative to a reference point. It includes four key elements: reference dependence, loss aversion, diminishing sensitivity, and probability weighting. The value function in prospect theory is concave in the region of gains but convex in the region of losses, and the weighting function leads individuals to overweight the tails of any distribution. The paper discusses the challenges in applying prospect theory in economics, including the difficulty of defining gains and losses in different contexts. It also reviews the applications of prospect theory in finance, insurance, and other areas of economics. In finance, prospect theory has been used to explain the cross-section of average returns, the aggregate stock market, and the disposition effect. In insurance, it has been used to explain insurance decisions and the annuitization puzzle. In other areas, it has been used to understand the endowment effect, consumption-savings decisions, industrial organization, and labor supply. The paper concludes that while prospect theory has been applied in various areas of economics, there are still challenges in applying it effectively. However, the rapid progress of the last decade suggests that prospect theory will continue to play an important role in economic analysis.