For over two centuries, the dominant theory of how people evaluate risky choices held that people weigh gambles by the subjective "utility" of different total wealth levels, an idea proposed by mathematician Daniel Bernoulli in the eighteenth century. It's an elegant theory, but it has a specific, decisive blind spot: it evaluates outcomes purely in terms of final wealth, completely ignoring the reference point a person is starting from — even though where someone starts turns out to matter enormously for how they actually respond to the exact same gamble.
This blind spot isn't a minor technical footnote; it's the reason prospect theory (which explicitly builds in reference points and loss aversion) eventually displaced Bernoulli's model as the better description of how people actually choose, despite the older theory's mathematical elegance and long dominance in economics.
Kahneman illustrates Bernoulli's blind spot with two hypothetical people: Anthony, currently worth $1 million, and Betty, currently worth $4 million. Both are offered an identical choice — a sure $2 million, or a 50/50 gamble between ending up with $1 million or $4 million. Bernoulli's wealth-based utility theory predicts they should make the same choice, since both are being asked to evaluate the same two final possible wealth outcomes. But their very different starting points make the actual psychological experience of the choice completely different: for Anthony, the sure $2 million represents a substantial gain from where he stands now, making it very attractive; for Betty, the same sure $2 million represents a substantial loss from her current position, making the riskier gamble to stay near $4 million far more appealing to her.