I am raising the following epistemological question related to Prospect Theory (and its refinements) : how do we know that Prospect Theory is a true theory in the sense that is falsifiable AND one with provable predictive power? All I am asking is for Prospect Theory to meet a few basic requirements. How do we know that Prospect Theory is a true theory of human behavior in markets if it does not meet even the basic requirements?
The easiest thing to do would be to start off with an example. Let us first ask ourselves the following question. Prospect Theory adherents claim that Prospect Theory can provide an explanation for the fact that riskier investments don't always have greater returns than less risky one. We need to answer the following questions first. Why is there a reason to believe that there should be an explanation for the fact that riskier investments don't always have greater returns than less risky investments? Why not a plethora of explanations?