A Prospect Theory Framework for Pricing Airline Terms & Conditions Ancillaries

Abstract Airline Terms & Conditions (T&C) ancillaries such as change waivers, cancellation-for-cash protections, and cancellation-for-credit assurances represent a rapidly growing revenue category in airline retailing. Traditional pricing approaches rely heavily on heuristics—percentage-of-fare rules, fixed markups, or simplified expected-value calculations. These methods treat travelers as objective risk evaluators, ignoring behavioral biases documented in psychology and insurance economics. Prospect Theory (PT), particularly its cumulative formulation (CPT), provides a mathematically grounded framework for modeling traveler perceptions of risk, loss, and uncertainty. This paper develops a structural CPT framework tailored to airline T&C ancillaries and shows how its components integrate into practical pricing workflows used by modern airline retail systems.