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Behavioural Finance and Prospect Theory

Mazilu, Sara Maria LU (2024) EOSK12 20241
Department of Economic History
Abstract
Behavioural finance is crucial for ensuring the soundness and stability of financial markets, as it concerns all actors from individual investors to regulatory institutions. This study quantifies the effect of three biases related to Prospect Theory, a model famously introduced by Kanheman and Tverksy (1979) which explains human behaviour under risk. The biases in question are loss aversion, the representativeness heuristic and the disposition effect. There were two main findings: buying stocks that have performed well in the past correlates positively with portfolio returns and satisfaction, but this strategy is ineffective for achieving particularly high profits. Secondly, never selling investments at a loss leads to a worse perceived... (More)
Behavioural finance is crucial for ensuring the soundness and stability of financial markets, as it concerns all actors from individual investors to regulatory institutions. This study quantifies the effect of three biases related to Prospect Theory, a model famously introduced by Kanheman and Tverksy (1979) which explains human behaviour under risk. The biases in question are loss aversion, the representativeness heuristic and the disposition effect. There were two main findings: buying stocks that have performed well in the past correlates positively with portfolio returns and satisfaction, but this strategy is ineffective for achieving particularly high profits. Secondly, never selling investments at a loss leads to a worse perceived portfolio performance compared to all other investors. (Less)
Popular Abstract
Behavioural finance is crucial for ensuring the soundness and stability of financial markets, as it concerns all actors from individual investors to regulatory institutions. This study quantifies the effect of three biases related to Prospect Theory, a model famously introduced by Kanheman and Tverksy (1979) which explains human behaviour under risk. The biases in question are loss aversion, the representativeness heuristic and the disposition effect. There were two main findings: buying stocks that have performed well in the past correlates positively with portfolio returns and satisfaction, but this strategy is ineffective for achieving particularly high profits. Secondly, never selling investments at a loss leads to a worse perceived... (More)
Behavioural finance is crucial for ensuring the soundness and stability of financial markets, as it concerns all actors from individual investors to regulatory institutions. This study quantifies the effect of three biases related to Prospect Theory, a model famously introduced by Kanheman and Tverksy (1979) which explains human behaviour under risk. The biases in question are loss aversion, the representativeness heuristic and the disposition effect. There were two main findings: buying stocks that have performed well in the past correlates positively with portfolio returns and satisfaction, but this strategy is ineffective for achieving particularly high profits. Secondly, never selling investments at a loss leads to a worse perceived portfolio performance compared to all other investors. (Less)
Please use this url to cite or link to this publication:
author
Mazilu, Sara Maria LU
supervisor
organization
alternative title
A survey of financial outcomes
course
EOSK12 20241
year
type
M2 - Bachelor Degree
subject
keywords
behavioural finance, prospect theory
language
English
id
9168156
date added to LUP
2024-07-12 11:11:48
date last changed
2024-07-12 11:11:48
@misc{9168156,
  abstract     = {{Behavioural finance is crucial for ensuring the soundness and stability of financial markets, as it concerns all actors from individual investors to regulatory institutions. This study quantifies the effect of three biases related to Prospect Theory, a model famously introduced by Kanheman and Tverksy (1979) which explains human behaviour under risk. The biases in question are loss aversion, the representativeness heuristic and the disposition effect. There were two main findings: buying stocks that have performed well in the past correlates positively with portfolio returns and satisfaction, but this strategy is ineffective for achieving particularly high profits. Secondly, never selling investments at a loss leads to a worse perceived portfolio performance compared to all other investors.}},
  author       = {{Mazilu, Sara Maria}},
  language     = {{eng}},
  note         = {{Student Paper}},
  title        = {{Behavioural Finance and Prospect Theory}},
  year         = {{2024}},
}