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1、BehavioralFinanceDr.EvangelosVagenas-NanosRoom359A,MainBuilding,WestQuadrangleLectures3:ProspectTheory,Framing,andMentalAccounting.ChallengestoMarketEfficiencyContentsLecture3•ProspectTheory,Framing,andMentalAccounting(AD,Ch.3)–ProspectTheory(3.2)–Framing(3.3)–MentalAccounting
2、(3.4)•Challengestomarketefficiency(AD,Ch.4)–Laggedreactionstoearningsannouncements(4.2)–Size,valuevs.growth,andmomentum(4.2andcoursenotes)–Noisetradingandlimitstoarbitrage(4.3)ProspectTheory(3.2)•ProspecttheorywasdevelopedbyKahnemanandTversky(1979)andisbasedonobservingactualbe
3、havior.•Experimentalevidencesaysthatpeopleoftenbehavecontrarytoexpectedutilitytheory.•Expectedutilitytheoryisnormative.–Whatpeopleshoulddo•Prospecttheoryispositive.–Whatpeopleactuallydo–Developedduetoviolationofexpectedtheory–Valuefunction(insteadofutilityfunction)–Weights(ins
4、teadofprobabilities)RiskAversionvs.RiskSeeking•Prospectpair1–choosebetween:–A:(.8,4,000)–B:(3,000)•Prospectpair2–choosebetween:–A:(.8,-4,000)–B:(-3,000)•Resultsfor1:mostprefersure$3000whichisconsistentwithriskaversion(expectedvalueofA=0.8*4,000=3,200)•Resultsfor2:mostdonotpref
5、ersure-$3000–thisisinconsistentwithriskaversion(expectedvalueofA=-3,200)•Impliespeopleareriskseekinginnegativedomain(reflectioneffect)!LossAversion•Prospectpair3:forwhichvalueofxareyouindifferentbetweenAandB?–A:noprospect–B:(.5,x,-$25)•TverskyandKahneman(1992)findanaveragevalu
6、eforxof$61.•Lossaversionisthetermthatdescribestheobservationthat,formostpeople,lossesloomlargerthangains.DevelopmentofProspectTheory–Theseandotherresultsledtoprospecttheoryasanalternativetoexpectedutilitytheory.–Keyprecepts:–Valuefunctionisintermsofgainsorlosses–Riskaversionin
7、positivedomain(Concave)–Riskseekinginnegativedomain(Convex)–Lossaversion•Describestheobservationthatformostpeople,lossesloomlargerthangainsProspectTheoryValueFunctionCommonValueFunction–Functionusedoftenis:v(z)=zαforz≥0,0<α<1v(z)=-λ(-z)βforz<0,>1,0<β<1–Valuefunction(notutilit
8、y)sovisused.–Earlierexample:askpeopleabout50/50cointosswherel
