Rethinking Prospect Theory for LLMs: Revealing the Instability of Decision-Making under Epistemic Uncertainty

Real-world decision-making often involves uncertainty expressed in linguistic rather than numerical terms, and Prospect Theory (PT) provides a classic framework for modeling human behavior under such uncertainty. Although recent studies have developed frameworks to estimate PT parameters for Large Language Models (LLMs), few have examined whether PT itself adequately describes LLM decision-making behavior. To address these gaps, we develop a streamlined workflow grounded in a classic behavioral economics experimental paradigm. First, we estimate PT parameters and evaluate how well the resulting model captures LLM decision-making behavior. We then derive probability mappings for epistemic markers in the same context and inject them into prompts to examine the stability of PT parameters under linguistic uncertainty. Our findings suggest that PT does not consistently provide a reliable account of LLM decision-making across models, and that its application to LLMs is likely sensitive to epistemic uncertainty. The findings caution against the deployment of PT-based frameworks in real-world applications where epistemic ambiguity is prevalent, giving valuable insights in behaviour interpretation and future alignment direction for LLM decision-making.