Prompt engineering is the iterative process of creating text inputs to guide AI models toward desired outputs. It involves using techniques such as clear instructions, delimiters, and specified output formats. Effective prompts may include examples, reference texts, and persona instructions. Advanced techniques like Chain-of-Thought (CoT) prompting for step-by-step reasoning, and the use of external tools can enhance results. Prompt engineering is more efficient and faster than fine-tuning for controlling model behavior.