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1、ProspectTheoryandTradingPatternsIJingYaoa,∗,DuanLibaInstituteforFinancialStudies,SchoolofEconomics,FudanUniversity,Shanghai200433,ChinabDepartmentofSystemsEngineeringandEngineeringManagement,TheChineseUniversityofHongKong,Shatin,NT,HongKongAbstractReferencedepen
2、dence,lossaversion,andriskseekingforlossestogethercomprisethepreference-basedcomponentofprospecttheorythatsetsitsvaluefunctionapartfromthestandardrisk-aversionmodel.Usinganelasticityanalysis,weshowthatthisdistinctivepreferencecomponentservestounderpinnegative-fe
3、edbacktradingpropensities,butcannotmanifestitselfinbehaviordirectlyorholisticallyattheindividual-choicelevel.Wethenproposeanddemonstratethatthemarketinteractionbetweenprospect-theoryinvestorsandregularCRRAinvestorsallowsthispref-erencecomponenttodominateinequili
4、briumbehaviorandhencehelpstoreestablishtheintuitivelinkbetweenprospect-theorypreferencesandnegative-feedbacktradingpatterns.Inthemodel,theinteractionalsoreconcilesthecontrarianbehaviorofprospect-theoryinvestorswithasymmet-ricvolatilityandshort-termreturnreversal
5、.Theresultssuggestthatprospect-theorypreferencescanleadinvestorstobehaveendogenouslyascontrariannoisetradersinthemarketinteractionprocess.Keywords:Prospecttheory;Negative-feedbacktrading;Priceelasticityofdemand;Contrarianbehavior;Thedispositioneffect;Noisetrading
6、IAcknowledgements:ThisworkwaspartiallysupportedbyResearchGrantsCouncilofHongKongundergrantCUHK414610,ShanghaiPujiangProgram,andNSFCunderProject71001029.WethankTerranceOdean,WeiXiong,aswellasIkeMathur(themanagingeditor)fortheirhelpfulcomments.Weareespeciallygrate
7、fultoananonymousreferee,whosethoughtfulsuggestionsandcommentshelptoimprovethepapersignificantly.∗CorrespondingauthorEmailaddresses:yaojing@fudan.edu.cn(JingYao),dli@se.cuhk.edu.hk(DuanLi)PreprintsubmittedtoElsevierApril23,2013“Twosouls,alas,aredwellinginmybreast,
8、Andoneisstrivingtoforsakeitsbrother.”———FaustPartI,Goethe.1.IntroductionForavarietyofreasons,prospecttheory(KahnemanandTversky,1979;henceforth,PT)hasbecomeamajorhypot
