Specific Applications of Prospect Theory to Behavioral Finance

2016 ◽  
pp. 213-246
Author(s):  
James Ming Chen
Keyword(s):  
Prospect Theory ◽  
Behavioral Finance

The impact of Mad Money recommendations during bull and bear markets

2016 ◽  
Vol 12 (1) ◽  
pp. 52-70 ◽  
Author(s):  
Adam J. Roszkowski ◽  
Nivine Richie
Keyword(s):  
Prospect Theory ◽  
Behavioral Finance ◽  
Abnormal Returns ◽  
Good News ◽  
Content Type ◽  
Bear Market ◽  
Bear Markets ◽  
The Impact ◽  
Investor Reaction ◽  
Bull And Bear Markets

Purpose – The purpose of this paper is to examine semi-strong market efficiency by observing the behavioral finance implications of Jim Cramer’s recommendations in bull vs bear markets. The authors extend the literature by analyzing investor reaction through the lenses of prospect theory, overreaction, and herding. Design/methodology/approach – The authors test for abnormal returns in response to Mad Money buy and sell recommendations. The authors use a sample of buy and sell recommendations from MadMoneyRecap.com from July 28, 2005 through February 9, 2009. The 3.5-year time period is the most recent and comprehensive set of Mad Money recommendations that has been tested to date. Findings – The results indicate market inefficiency at the semi-strong level. Furthermore, the findings highlight the loss aversion tendencies of investors in regards to prospect theory of Kahneman and Tversky (1979) as well as the disposition effect of Shefrin and Statman (1985). Evidence also exists consistent with the herding and overreaction hypotheses. Practical implications – The evidence suggests contrarian behavior in which investors respond positively to good news in bad times – perhaps, in effort to stay the course and at least break even. This behavior may suggest that losers tend to hold on to losses in hopes of recouping them. Thus, positive information in bad times could further persuade market participants to hang on to or buy more of losers, while also persuading non-shareholders to buy in as well. Originality/value – Though other studies including Kenny and Johnson (2010) have estimated abnormal returns in response to analyst recommendations, to the knowledge, none has examined behavioral implications of investor reaction to buy and sell recommendations in both bull and bear markets. Furthermore, the study captures a longer bull and bear market and covers two definitions of such markets.

Can Prospect Theory Predict the Decision Making by Professionals?

2016 ◽  
Vol 5 (1) ◽  
pp. 24-47
Author(s):  
Neslihan Yilmaz ◽  
Can Kalaycioglu
Keyword(s):  
Decision Making ◽  
Pharmaceutical Industry ◽  
Prospect Theory ◽  
Behavioral Finance ◽  
Learning Effect ◽  
Finance Industry ◽  
Behavioral Studies ◽  
General Studies

Behavioral studies show that people are subject to biases in general. Studies in the behavioral finance literature mostly focus on finance professionals and top level managers, and report similar results. This study focuses on professionals outside of the finance industry and who are of lower levels. Moreover, it looks at whether there is a learning effect among these professionals through the design of the authors' survey. They test the predictions of prospect theory among the professionals in the pharmaceutical industry and find that prospect theory predicts the respondents' behavior in general. They also show that there is some learning effect among these professionals. Finally, the authors find that demographics and experience differently influence respondents' answers.

Theory of Behavioral Finance

2015 ◽  
pp. 1-24 ◽  
Author(s):  
Jaya M. Prosad ◽  
Sujata Kapoor ◽  
Jhumur Sengupta
Keyword(s):  
Financial Markets ◽  
Prospect Theory ◽  
Behavioral Finance ◽  
Individual Investors ◽  
Market Conditions ◽  
Market Anomalies ◽  
Behavioral Theories ◽  
Portfolio Managers ◽  
Academic Events

This chapter explores the evolution of modern behavioral finance theories from the traditional framework. It focuses on three main issues. First, it analyzes the importance of standard finance theories and the situations where they become insufficient i.e. market anomalies. Second, it signifies the role of behavioral finance in narrowing down the gaps between traditional finance theories and actual market conditions. This involves the substitution of standard finance theories with more realistic behavioral theories like the prospect theory (Kahneman & Tversky, 1979). In the end, it provides a synthesis of academic events that substantiate the presence of behavioral biases, their underlying psychology and their impact on financial markets. This chapter also highlights the implications of behavior biases on financial practitioners like market experts, portfolio managers and individual investors. The chapter concludes with providing the limitations and future scope of research in behavioral finance.

scholarly journals Behavioral Finance: a comparative study using the prospect theory at the undergraduate course in accountancy

2009 ◽  
pp. 383-403 ◽  
Author(s):  
Rhoger Fellipe Marinho ◽  
Umbelina Cravo Teixeira Lagioia ◽  
Carolina Veloso Maciel ◽  
Raimundo Nonato Rodrigues
Keyword(s):  
Comparative Study ◽  
Prospect Theory ◽  
Behavioral Finance

scholarly journals A influência das emoções sobre o efeito dotação

2009 ◽  
Vol 7 (2) ◽  
pp. 196
Author(s):  
Flávia De Souza Costa Neves Cavazotte ◽  
Paulo Tavares Dias Filho ◽  
Otacílio Torres Vilas Boas
Keyword(s):  
Prospect Theory ◽  
Behavioral Finance ◽  
Loss Aversion ◽  
Positive Emotions ◽  
Negative Emotions ◽  
Endowment Effect ◽  
Research Model ◽  
Review Of The Literature ◽  
Brazilian Sample

According to prospect theory, individuals with loss aversion would tend to attribute a higher value to a good once their ownership over it had been established. Such tendency would cause reluctance to trade the good, even if an equivalent one were offered in exchange. Thaler (1980) named this phenomenon endowment effect. In this article, we present a review of the literature about the topic, which has been one of the most investigated themes in the relatively recent field of behavioral finance. Adopting Knetsch’s research model (1989), we conducted two experiments in order to investigate the phenomenon in a Brazilian sample, specifically testing the influence of emotions on its manifestation. The results replicate findings for the endowment effect, and suggest that negative emotions attenuate the observed effects. Positive emotions, however, did not have any detectable influence over the phenomenon.

scholarly journals Desenvolvimento de uma Medida de Desempenho Comportamental

2012 ◽  
Vol 10 (3) ◽  
pp. 395
Author(s):  
Marcelo Cabus Klotzle ◽  
Leonardo Lima Gomes ◽  
Luiz Eduardo Teixeira Brandão ◽  
Antonio Carlos Figueiredo Pinto
Keyword(s):  
Prospect Theory ◽  
Decision Maker ◽  
Performance Measures ◽  
Behavioral Finance ◽  
Expected Utility ◽  
Loss Aversion ◽  
Utility Theory ◽  
Expected Utility Theory ◽  
Performance Measure ◽  
Uncertain Outcomes

Since the fifties, several measures have been developed in order to measure the performance of investments or choices involving uncertain outcomes. Much of these measures are based on Expected Utility Theory, but since the nineties a number of measures have been proposed based on Non-Expected Utility Theory. Among the Theories of Non-Expected Utility highlights Prospect Theory, which is the foundation of Behavioral Finance. Based on this theory this study proposes a new performance measure in which are embedded loss aversion along with the likelihood of distortions in the choice of alternatives. A hypothetical example is presented in which various performance measures, including the new measure are compared. The results showed that the ordering of the assets varied depending on the performance measure adopted. According to what was expected, the new performance measure clearly has captured the distortion of probabilities and loss aversion of the decision maker, ie, those assets with the greatest negative deviations from the target were those who had the worst performance.

Thirty days are enough: what determines the crowd's cash time in agri-food crowdfunding?

2020 ◽  
Vol 12 (3) ◽  
pp. 553-575
Author(s):  
Yaokuang Li ◽  
Junjuan Du ◽  
Weizhong Fu
Keyword(s):  
Prospect Theory ◽  
Behavioral Finance ◽  
Poverty Alleviation ◽  
Investment Decisions ◽  
Expected Value ◽  
Food Category ◽  
Content Type ◽  
Healthy Development ◽  
Agriculture And Food ◽  
Practical Implications

PurposeThe purpose of this paper is to investigate the factors influencing quick cash by crowd in agri-food crowdfunding campaigns; this paper utilizes prospect theory to analyze the value and weighting functions of the crowd's cash.Design/methodology/approachUsing samples of crowdfunding campaigns launched in the Zhongchou (www.Zhongchou.cn) platform's agriculture and food category, this paper employs a multivariate linear regression model to investigate factors that motivate the crowd to make quick investment decisions.FindingsThe results demonstrate that lowering the investment threshold, improving publicity, and increasing the benefits of a campaign can increase the decision weight assigned to a campaign, thereby motivating the crowd to make quick investment decisions. Improving the product's reputation, enhancing campaign promotion, and diversifying the reward scheme can increase the crowd's expected value of the campaign – another motivation for a quicker cash decision.Practical implicationsThis paper can help initiators, platforms and regulators better fulfil their roles in promoting the rapid, healthy development of crowdfunding in the agri-food industry, especially in the context of the Chinese launch of significant initiatives to develop crowdfunding aimed at rural e-commerce and poverty alleviation.Originality/valueThis paper extends the behavioral finance concept of prospect theory to agri-food crowdfunding campaigns and investigates factors that motivate the crowd to make quick investment decisions. Additionally, this paper demonstrates that the backers of crowdfunding are not perfectly rational and can be motivated to invest by increasing mean decision weight and expected value of a campaign.

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