Subject The article considers the prospect theory, the relation of the rationale of behavioral finance and the original tools of financial psychological investigations of the mid-twentieth century, the possibilities of practical application of achievements of initial studies being the backbone of the prospect theory. Objectives The study aims to substantiate the continuity of the prospect theory and the theories of first financiers who investigated financial decision-making under risk. Methods I apply modern research methods like history periodization, systematic approach, and comparative-historical methods. To illustrate the development of the theory, I employ methods and techniques of formal logic, such as analysis, synthesis, induction, hypothesis. Results The historical roots and fundamentals of the prospect theory stem from the first financiers, who studied financial decision-making under risk. The article shows the development of scientific ideas about making decisions in conditions of uncertain risks from a historical perspective. Historical theoretical explanations of the main elements of the theory developed on the basis of psychological studies in the years preceding the emergence of the prospect theory. They formed the basis for subsequent development of behavioral finance. Conclusions The findings may be used to analyze the behavior of investors in the stock market, in corporate finance in conditions of instability and crisis phenomena. The use of theories preceding the prospect theory complements and expands the classical tools of traditional finance, contributes to timely adjustment of investment decisions, improves the quality and efficiency of financial decisions.
Keywords: prospect theory, behavioral finance, cost function graph, uncertainty, utility function graph
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