Behavioural Finance and Prospect Theory
(2024) EOSK12 20241Department 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:
http://lup.lub.lu.se/student-papers/record/9168156
- author
- Mazilu, Sara Maria LU
- supervisor
- organization
- alternative title
- A survey of financial outcomes
- course
- EOSK12 20241
- year
- 2024
- 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}}, }