Prospect Theory and the CAPM: A contradiction or coexistence?∗
نویسندگان
چکیده
Under the assumption of normally distributed returns, we analyze whether the Cumulative Prospect Theory of Tversky and Kahneman (1992) is consistent with the Capital Asset Pricing Model. We find that in every financial market equilibrium the Security Market Line Theorem holds. However, under the specific functional form suggested by Tversky and Kahneman (1992) financial market equilibria do not exist. We suggest an alternative functional form that is consistent with both, the experimental results of Tversky and Kahneman and also with the existence of equilibria. JEL classification: C 62, D 51, D 52, G 11, G 12.
منابع مشابه
Two Paradigms and Nobel Prizes in Economics: a Contradiction or Coexistence?
Markowitz and Sharpe won the Nobel Prize in Economics for the development of MeanVariance (M-V) analysis and the Capital Asset Pricing Model (CAPM). Kahneman won the Nobel Prize in Economics for the development of Prospect Theory. In deriving the CAPM, Sharpe, Lintner and Mossin assume expected utility (EU) maximisation in the face of risk aversion. Kahneman and Tversky suggest Prospect Theory ...
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