scholarly journals Segregation and Integration: A Study of the Behaviors of Investors with Extended Value Functions

2010 ◽  
Vol 2010 ◽  
pp. 1-8 ◽  
Author(s):  
Martin Egozcue ◽  
Wing-Keung Wong
Keyword(s):  
Prospect Theory ◽  
Mental Accounting ◽  
Analytical Theory ◽  
Value Functions ◽  
Multiple Outcomes ◽  
Extended Value ◽  
Hedonic Editing

This paper extends prospect theory, mental accounting, and the hedonic editing model by developing an analytical theory to explain the behavior of investors with extended value functions in segregating or integrating multiple outcomes when evaluating mental accounting.

A Prospect Theory Explanation of the Disposition to Trade Losing Investments for Less Than Market Price

2002 ◽  
Vol 90 (3) ◽  
pp. 851-857
Author(s):  
D. J. Johnstone
Keyword(s):  
Prospect Theory ◽  
Market Price ◽  
Market Value ◽  
Mental Accounting ◽  
New Venture ◽  
Open Market ◽  
Psychological Benefits ◽  
Sale Price ◽  
Monetary Loss ◽  
Mental Integration

Investors have a proven general reluctance to realize losses. The theory of “mental accounting” suggests that losses are easier to accept when mentally integrated with either preceding losses or with compensatory gains. Mental integration is made easier when a failed asset is exchanged against a new, apparently profitable, acquisition. The alternative is to sell the existing asset on the open market before re-investing the proceeds as desired. This is emotionally less appealing than “rolling over” a losing investment into a new venture by way of an asset trade. The psychological benefits of exchanging rather than selling a failed asset come at a cost. It is typical of trade-in arrangements, e.g., where one trades an old car against a new one, that the effective sale price of the existing asset is less than current market value. Acceptance of this low price adds to the investor's total monetary loss on the existing asset but is essential to an overall package deal apart from which that asset would often remain belatedly unsold.

5. Risky choices

2017 ◽  
pp. 49-66
Author(s):  
Michelle Baddeley
Keyword(s):  
Decision Making ◽  
Prospect Theory ◽  
Expected Utility Theory ◽  
Mental Accounting ◽  
Lottery Ticket ◽  
Risk And Uncertainty ◽  
The Road ◽  
Risky Choices ◽  
Accounting Model ◽  
Isolation Effects

When we decide to cross the road, buy a lottery ticket, or invest our money, the decision involves risk and uncertainty. ‘Risky choices’ looks at how economists usually think of risk as quantifiable—in the form of expected utility theory—but behavioural economists challenge this understanding of risk. Daniel Kahneman and Amos Tversky developed prospect theory, which could incorporate the anomalous behaviour identified by the Allais and Ellsberg Paradoxes. They argued that any decision-making theory should be able to explain the certainty, reflection, and isolation effects. Alternatives to prospect theory include Richard Thaler’s mental accounting model and the regret theory of Graham Loomes and Robert Sugden.

The Effect of the Timing and Direction of Capital Gain Tax Changes on Investment in Risky Assets

2012 ◽  
Vol 88 (2) ◽  
pp. 499-520 ◽  
Author(s):  
Diana Falsetta ◽  
Timothy J. Rupert ◽  
Arnold M. Wright
Keyword(s):  
Mental Accounting ◽  
Data Availability ◽  
Capital Gain ◽  
Tax Law ◽  
Risky Assets ◽  
Risky Investment ◽  
Hedonic Editing ◽  
Tax Changes

ABSTRACT This study examines the effect of timing (gradual versus immediate) and direction (tax increase or decrease) of a tax change on taxpayer behavior. Specifically, we focus on capital gain tax changes and preferences for investment in riskier assets. We run an experiment with 117 participants who allocate investment dollars between two funds of differing risk. Drawing on mental accounting and hedonic editing (Thaler 1985; Thaler and Johnson 1990), we posit that a tax decrease (a “gain”) implemented gradually over several years will result in a greater increase in risky investment once the decrease is fully implemented than when the tax change is implemented all at once. In contrast, once a tax increase (a “loss”) is fully implemented, a smaller decrease in risky investment will result when the change occurs all at once rather than gradually. Our findings support these expectations, suggesting that the manner of implementing a tax law change may impact decisions. Data Availability: Contact the authors.

scholarly journals You cannot accurately estimate an individual’s loss aversion using an accept-reject task

2020 ◽  
Author(s):  
Lukasz Walasek ◽  
Neil Stewart
Keyword(s):  
Prospect Theory ◽  
Loss Aversion ◽  
Model Parameters ◽  
Probability Weighting ◽  
Value Functions ◽  
Trade Off ◽  
Simple Version ◽  
The Poor ◽  
Gain Loss ◽  
Linear Probability

Prospect theory's loss aversion is often measured in the accept-reject task, in which participants accept or reject the chance of playing a series of gambles. The gambles are two-branch 50/50 gambles with varying gain and loss amounts (e.g., 50% chance of winning $20 and a 50% chance of losing $10). Prospect theory quantifies loss aversion by scaling losses up by a parameter λ. Here we show that λ suffers from extremely poor parameter recoverability in the accept-reject task. λ cannot be reliably estimated even for a simple version of prospect theory with linear probability weighting and value functions. λ cannot be reliably estimated even in impractically large experiments with participants subject to thousands of choices. The poor recoverability is driven by a trade-off between λ and the other model parameters. However, a measure derived from these parameters is extremely well recovered—and corresponds to estimating the area of gain-loss space in which people accept gambles. This area is equivalent to the number of gambles accepted in a given choice set. That is, simply counting accept decisions is extremely reliably recovered—but using prospect theory to make further use of exactly which gambles were accepted and which were rejected does not work.

Perceptions and Framing of Risk, Uncertainty, Loss, and Failure in Entrepreneurship

2014 ◽  
Vol 3 (2) ◽  
pp. 1-17
Author(s):  
Kimberly M. Green
Keyword(s):  
Decision Making ◽  
Prospect Theory ◽  
Risk Taking ◽  
Organizational Innovation ◽  
Mental Accounting ◽  
Reference Points ◽  
Future Research ◽  
Perceptions Of Risk ◽  
Learning From Failure ◽  
Innovation And Change

Research indicates that perceptions of risk and loss affect decision-making. Entrepreneurship presents a context in which risk, failure, and loss frequently frame decisions. This paper presents a review of the entrepreneurship literature that is grounded in Kahneman and Tversky's 1979 article on prospect theory. The theory's contribution to the understanding of how the framing of losses affects decisions offers a useful foundation for considering streams of research in entrepreneurship and small business, given that the prospects for loss and failure are high in these endeavors. This review identifies 79 articles and organizes them into four broad themes: risk-taking perspectives of the entrepreneur and stakeholders, aspirations and reference points, organizational innovation and change, and learning from failure. The review concludes by considering the future research potential in the topics of regret, mental accounting, and an understanding of competitors.

Sign in / Sign up

Export Citation Format

Share Document