scholarly journals What Can Explain Momentum? Evidence from Decomposition

2021 ◽  
Author(s):  
Jiaqi Guo ◽  
Peng Li ◽  
Youwei Li
Keyword(s):  
Prospect Theory ◽  
Robustness Analysis ◽  
Interaction Effects ◽  
Mental Accounting ◽  
Firm Characteristics ◽  
Anchoring Effect

This study comprehensively evaluates and ranks a large number of competing explanations for the momentum anomaly. As a benchmark for evaluation, firm fundamentals are found to be the most promising among well-known explanations of momentum, followed by prospect theory and mental accounting, and anchoring effect. Collectively, all explanations capture 31% of momentum, whereas 69% of momentum remains unexplained. This study thoroughly examines what fractions of the momentum anomaly emerge from the interaction effects between past returns and various firm characteristics. It is further found that strategies based on firm characteristics and residual momentum can significantly alleviate the severity of momentum crashes. Finally, robustness analysis is provided for choosing different formation and holding periods, excluding January observations, and analyze at the level of portfolio rather than individual stock. This paper was accepted by David Simchi-Levi, finance.

scholarly journals Bottom-up versus top-down factor investing: an alpha forecasting perspective

2020 ◽  
Author(s):  
Martin Zurek ◽  
Lars Heinrich
Keyword(s):  
Interaction Effects ◽  
Informational Content ◽  
Firm Characteristics ◽  
Recent Discussion ◽  
High Concentration ◽  
Top Down ◽  
Bottom Up ◽  
Factor Investing ◽  
Significant Performance ◽  
The Difference

AbstractIn a recent discussion about efficient ways to combine multiple firm characteristics into a multifactor portfolio, a distinction was made between the bottom-up and top-down approach. Both approaches integrate characteristics with equal weights and ignore interaction effects from differences in informational content and correlations between the firm characteristics. The authors complement the bottom-up approach for the missing interaction effects by implementing a linear alpha forecasting framework. Bottom-up versus top-down factor investing is typically discussed using the assumption that all characteristics are equally priced, but the pricing impact of different firm characteristics can vary tremendously. The alpha forecasting perspective provides a theoretical motivation for factor investing and helps to compare the bottom-up and top-down approach with regard to the difference of informational content and interaction effects between firm characteristics. Taking into account the difference in informational content between firm characteristics leads to significant performance improvement in factor models with a high concentration of informational content. Equally weighted characteristics result in related performance irrespective of whether the bottom-up or top-down approach is applied.

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.

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.

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.

scholarly journals Influence of discount price announcements on consumer's behavior

2012 ◽  
Vol 52 (6) ◽  
pp. 657-671 ◽  
Author(s):  
Giuliana Isabella ◽  
Alexandre Ierulo Pozzani ◽  
Vinicios Anlee Chen ◽  
Murillo Buissa Perfi Gomes
Keyword(s):  
Prospect Theory ◽  
Research Study ◽  
Framing Effect ◽  
Theoretical Framework ◽  
Mental Accounting ◽  
Purchase Intentions ◽  
Common Occurrence ◽  
Discount Rates ◽  
Absolute Value ◽  
Patterns Of Behavior

The theoretical framework that underpins this research study is based on the Prospect Theory formulated by Kahneman and Tversky, and Thaler's Mental Accounting Theory. The research aims to evaluate the consumers' behavior when different patterns of discount are offered (in percentage and absolute value and for larger and smaller discounts). Two experiments were conducted to explore these patterns of behavior and the results that were obtained supported the view that the framing effect was a common occurrence. The patterns of choice of individuals in a sample were found to be different due to changes in the ways discounts were offered. This can be explained by the various ways of presenting discount rates that had an impact on the influence of purchase intentions, recommendations and quality perception.

Solving some financial puzzles with prospect theory and mental accounting : a survey

2008 ◽  
Vol 118 (4) ◽  
pp. 475 ◽  
Author(s):  
Marie-Hélène Broihanne ◽  
Maxime Merli ◽  
Patrick Roger
Keyword(s):  
Prospect Theory ◽  
Mental Accounting
Sign in / Sign up

Export Citation Format

Share Document