Behavioral Finance 1.1 Prospect Theory and Decisions under Risk
نویسنده
چکیده
Financial decisions can only be understood by considering individual behavior and its deviations from rational behavior. Financial markets are based on a multitude of decisions by individuals. Therefore it is only natural that decision theory plays a fundamental role in understanding financial markets. Probably the most important class of financial decisions are decisions under risk. They can be modeled with the celebrated “Cumulative Prospect Theory” by Amos Tversky and Daniel Kahneman (Nobel prize 2002). This theory describes the “subjective utility” of an uncertain event (e.g. an investment) by a functional which (in the most general case) can be written as
منابع مشابه
Explaining Heterogeneity in Risk Preferences Using a Finite Mixture Model
This paper studies the effect of the space (distance) between lotteries' outcomes on risk-taking behavior and the shape of estimated utility and probability weighting functions. Previously investigated experimental data shows a significant space effect in the gain domain. As compared to low spaced lotteries, high spaced lotteries are associated with higher risk aversion for high probabilities o...
متن کاملProspect theory on the brain? Toward a cognitive neuroscience of decision under risk.
Most decisions must be made without advance knowledge of their consequences. Economists and psychologists have devoted much attention to modeling decisions made under conditions of risk in which options can be characterized by a known probability distribution over possible outcomes. The descriptive shortcomings of classical economic models motivated the development of prospect theory (D. Kahnem...
متن کاملUnderstanding clinical and non-clinical decisions under uncertainty: a scenario-based survey
BACKGROUND Prospect theory suggests that when faced with an uncertain outcome, people display loss aversion by preferring to risk a greater loss rather than incurring certain, lesser cost. Providing probability information improves decision making towards the economically optimal choice in these situations. Clinicians frequently make decisions when the outcome is uncertain, and loss aversion ma...
متن کاملبررسی نقش پرتفوی رفتاری در تصمیمگیری سرمایهگذاران بورس اوراق بهادار تهران
More than 50 years ago Friedman and Savage stated that investors who purchase lottery tickets (risk taking behavior), buy insurance coverage (risk averse behavior) at the same time. They proposed an “S” shape utility function that features concave as loss and convex as winning. Eisenhauer and many other researchers have confirmed risk behavior as suggested by Friedman and Savage. Shefrin and St...
متن کاملNaïve learning algorithms utilized for the prediction of stock prices to compare economic models of decision making
An advance in economic thought is in the area of behavioral economics where traditional models of rational decision-making are challenged by newer models of behavior such as Prospect Theory. This is coupled with a world where algorithms have abilities to learn, remember and evolve over time to make better decisions. The advances on these two fronts are forcing the world of markets to be analyze...
متن کامل