Benjamin Lucas56 White#50

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How does prospect theory explain forex trader behavior?

Prospect theory, developed by Kahneman and Tversky, explains how people evaluate gains and losses asymmetrically. In forex, traders prefer small certain gains over larger risky ones, but also gamble to avoid certain losses. Institutions design strategies accounting for these biases, while retail traders fall victim to them. Benefits: insight into why traders act irrationally. Risks: systematic underperformance due to biased decision-making. The lesson is to adopt rules that override human instincts—like fixed risk-reward ratios and stop-losses. Prospect theory shows forex is not just numbers but psychology: success depends on managing human bias as much as market risk.